The findings of the “2010 International Arbitration Survey: Choices in International Arbitration” conducted by the Queen Mary School of International Arbitration*, discussed some of the factors that are taken into account when choosing an arbitrator. Even more interestingly, the study also highlighted that the in-house counsel surveyed were often disappointed with the performance of their arbitrator and the reasons why.

The study demonstrated that half (50%) of the participants claimed to have been disappointed by the performance of the arbitrators. The main reasons cited for their disappointment were: 1. “bad decision/outcome” (20%), 2. “overly flexible/failed to control process” (12%), 3. “caused delays” (11%), 4. “poor reasoning in award” (9%) and “lack of knowledge or expertise on the subject matter of the dispute” (9 %) and 5. “tardiness in rendering an award” (8%).

The study also looked at the choice between a sole arbitrator versus a three-member panel, 73% of respondents have a general preference as to the number of arbitrators and the 87% of them prefer a three-member arbitral tribunal because they feel it leads to greater “neutrality” and a “balanced award”, while less complexity of the case and a reduced fee structure could lead to the choice of a sole arbitrator.

The qualities that influence practitioners’ decision on the choice of a “sole” arbitrator or of the “co-arbitrator” are similar, they were listed as: 1. “open-mindedness” and “fairness” (68% of respondents for the choice of sole arbitrator and 66% for the choice of co-arbitrator), followed by 2. “prior experience of arbitration” (62% and 58%), then 3. “quality of award” (58% and 56%). The “availability” of the arbitrators is an important factor that corporate counsels take into consideration too (51% for the choice of sole arbitrator and 55% for the choice of co-arbitrator).

“Soft skills”, such as working well with other members of the panel and the parties or adopting a “helpful and friendly demeanor”, is an important factor on the positive impact on conducting arbitral proceedings. Other interesting factors that only apply in the choice of a co-arbitrator were listed as the “likelihood that arbitrator will be able to influence Chair of tribunal” (for 47% of the respondents), the “favorable disposition on the merits of the dispute” (for a 37%) and finally “willingness to consult with appointing party on selection of Chair” (37%). These factors demonstrate how the choice of a co-arbitrator is an important strategic decision for a party; even before the arbitration proceeding has begun.

Another interesting aspect was the respondents’ willingness to assess arbitrators’ performance at the end of the dispute (75%). Different methods of assessment were proposed, such as to “report to arbitration institution (if any)” (76%), to submit “publicly available reviews” (30 %) or even to “report [directly] to arbitrators”, (27%). A minority of respondents, though, expressed their doubts about whether parties have the ability to make an objective evaluation of the arbitrators’ performance.

This minority opinion indeed has a point, because the challenge of an arbitral award based on any of the grounds for refusal of recognition or of enforcement is indirectly an assessment of the tribunal’s performance. It is our view that arbitrators are already sufficiently assessed through court challenges and that a party assessment would lead to biased results depending on whether the party was successful in the arbitration proceeding. Regardless, it is important to consider all relevant factors when choosing an arbitrator.

*This article is the second in a series of articles about the findings of the “2010 International Arbitration Survey: Choices in International Arbitration” by the Queen Mary School of International Arbitration.

In fact, different parties take into account different factors when making the choice of law decision. Some of these factors can be found in the “2010 International Arbitration Survey: Choices in International Arbitration“, conducted by the Queen Mary School of International Arbitration at the University of London*.

Participants included general and in-house counsel from corporations “across a range of industries and geographical regions, and a significant number of corporations based in emerging markets“. Based on 136 questionnaire responses and on further qualitative data drawn from 67 interviews, the survey demonstrated what considerations are taken into account when an arbitration clause is negotiated.

The top three factors that influenced the choice of law are (1) neutrality and impartiality of the law governing the dispute (66%); followed by (2) the appropriateness of the law for the particular type of contract (60%); as well as (3) the familiarity with and experience of the particular law (58%).

Although 44% of the participants would like to apply their own law on the merits, for obvious reasons (the familiarity factor), the second choice (25%) was English law because of its neutrality.

In practice, when parties negotiate the applicable law governing the agreement and subsequently the dispute, they will naturally begin by proposing their own law. However, if an agreement is not reached, they will agree on a “neutral” law, such as English law. In fact, the study found that 40% of those surveyed apply English law overall. We know that for some other findings a “neutral” law can be Swiss, French or coming from another country. In fact, even this question of “neutral” law may be questioned depending on the background of the contracting parties.

In order to complete the picture, it is interesting to note that the general principles of law or transnational rules and laws are not among those preferred to govern the dispute. For example, only 2% of participants “often” choose the ex aequo et bono principles to govern the dispute, (allowing the arbitrator to consider solely what they consider to be fair and equitable in the case at hand), while 16 % “often” choose the general principles of law, commercial practices or “fairness and equity.” Other rules of commercial law, such as UNIDROIT Principles and INCOTERMS (14%), Uniform Customs and Practice for Documentary Credits (UCP) (8%) or even the Convention on Contracts for the International Sale of Goods (CISG) of the UN (6%) are less often used in practice than one might expect.

In the absence of a choice of law in the arbitration agreement determined by the parties, arbitrators enjoy the freedom to determine the applicable law. What would also be interesting to examine is the criteria that arbitrators take into consideration in order to determine the applicable law on the merits of a case. Perhaps we will have to wait for another year’s survey …

*This article is the first in a series of articles about the findings of the “2010 International Arbitration Survey: Choices in International Arbitration” by the Queen Mary School of International Arbitration.

The United Nations Commission on International Trade Law (UNCITRAL) has revised its arbitration rules, nearly thirty-five years after their initial adoption in 1976.

Given their prominence in the field, this is a significant event in the world of international arbitration; UNCITRAL was first established in 1966 by the UN General Assembly in response to “disparities in national laws.” UNCITRAL’s central mission has always been the “progressive harmonization and unification” of international trade law.

Since their inception, the Rules have been used in a variety of international disputes, including disputes between private parties, investor-state disputes, and state-to-state disputes. They are often used in ad hoc arbitrations because they provide a procedural framework, which helps parties avoid unnecessary disagreements and delays.

UNCITRAL Arbitration Rules- 2010 Revision

The central aim of the recent revision of the UNCITRAL arbitration rules was to modernize the Rules, with an ultimate goal of improving the effectiveness and efficiency in arbitration.

One important area of focus in the UNCITRAL revisions is information technology, which has greatly expanded and gone through meaningful changes and advances since the initial adoption of the UNCITRAL Rules in 1976. Advances in information technology have been addressed in Articles 2.2 and 28.4, which now contemplate the possibility of arbitration through “email”, “facsimile”, and “videoconference.” It is specified in the UNCITRAL Arbitration Rules that witnesses and experts may be “examined through means of telecommunication that do not require their physical presence at the hearing.”

Another significant change in today’s business world as compared to the time of the initial Rules adoption is the fast pace of business and the growing demand for immediate communication. To that end, Article 17 now requires that arbitrators “conduct the proceedings so as to avoid unnecessary delay and expense” and “establish the provisional timetable for arbitration.”

The new rules were adopted by UNCITRAL on June 25, 2010 and came into force on August 15, 2010. UNCITRAL’s website points out that the revisions, though substantial, have not forsaken the spirit of the original text: “It is expected that the Rules, as revised, will continue to contribute to the development of harmonious international economic relations.”

On September 28, 2010, the U.S. Court of Appeals for the Ninth Circuit issued an important ruling, overturning a San Francisco district court’s confirmation of a JAMS arbitral award in an international dispute. The panel reversed on the grounds that the arbitral procedure was not in accordance with the agreement of the parties. Here’s how it all began:

In January 2003, RAE Systems, Inc. entered into a contract with Polimaster Ltd., a manufacturing company located in Belarus, to manufacture and distribute Polimaster-developed radiation detection devices. Disputes arose in the course of the contract. Their agreement contained a dispute resolution clause, which provided that:

1. The parties should exert every effort to resolve their dispute by negotiation; and
2. If the parties are unable to settle disputes by negotiation, they should do so “by means of arbitration at the defendant’s site.”

The parties agreed to submit their claims to JAMS arbitration in California. The situation became more complicated when the defendant RAE sought to file counterclaims against Polimaster, and in response, Polimaster asserted that per the agreement, RAE needed to bring those claims through a separate arbitration in Belarus. The arbitrator determined that prosecuting claims with affirmative defenses in one venue while prosecuting counterclaims with identical defenses in another venue would “be contrary [to] ‘notions of fairness, judicial economy and efficiency.’”

Ultimately, through the arbitration, Polimaster’s claims were dismissed and RAE was awarded several million dollars for its counterclaims. Polimaster moved to vacate the arbitral award in the Northern District of California District Court, but the district court sided with RAE, confirming the arbitration panel’s findings. Polimaster appealed to the U.S. Court of Appeals for the Ninth Circuit.

In a sharply split 2-to-1 decision, the Court of Appeals reversed the district court, and held that the counterclaims needed to be filed in Belarus. This was because the phrase in the arbitral agreement “at the defendant’s site” was unambiguous in its requirement that counterclaims be brought in separate arbitration in the home jurisdiction of the counterclaim defendant.

In the split decision, the primary point of contention between the majority and the dissent dealt was the interpretation of the word “defendant” in the parties’ agreement. The majority stated that “defendant” could only refer to the party who claims were leveled against, while the dissent stated that it was possible to interpret “defendant” as the party who was defending itself in the initial action. A significant point in the dissent’s argument is that it is only necessary to show that the agreement could be ambiguous to disprove the majority. This is because, typically, when a clause is deemed ambiguous, it falls on the arbitrator to interpret the agreement.

Given the strong discourse from both sides in the decision, it is unlikely that this is the last we will be hearing of this case. It is also unlikely that this is the last case that will address the question of who is responsible for determining the validity of arbitral awards. For right now, however, this is another prime example of the importance of clarity in arbitration clauses, and how even one ambiguous word can spell big trouble when a dispute arises.

The background of the case is as follows: an American company was hired to construct an airbase in Iraq. The American company hired a Turkish company to subcontract for part of the project in 2004, but terminated the subcontract agreement prematurely in 2005. Pursuant to their joint arbitration agreement, the Turkish company brought the dispute to a Swiss arbitral tribunal, which rejected the Turkish company’s claims and instead awarded damages of $400,000 to the American company.

The Turkish company filed a request with the Federal Tribunal to annul, or overturn, the tribunal’s decision on the grounds that the tribunal had violated its “right to be heard.” Specifically, the Turkish company claimed that the arbitral tribunal did not take into consideration its allegation that it had received a smaller payment from the American company than what the American company claimed to have paid. The arbitral tribunal filed papers defending its decision, noting that the Turkish company hadn’t detailed the discrepancy in pay in its post-hearing brief. The Federal Tribunal found in favor of the Turkish company and set aside the previous award on this point.

The burden of proof for a violation of the “right to be heard” lies on the party that alleges to have been harmed. This party must show “… in what way an oversight by the arbitrators prevented it from being heard on an important issue.” The harmed party does this by establishing two main points:

1. That the arbitral tribunal did not examine some evidence or legal issues that had been submitted to it, and;
2. That those elements were significant enough to impact the disposition of the dispute.

If the award is completely silent as to some apparently important elements, it falls on the arbitrators, or the responding party, to prove that, contrary to the appellant’s allegations, the elements omitted were not pertinent to the case. Alternatively, if the elements were pertinent, they must show that that the elements were rebutted by the arbitral tribunal.

In the case at hand, the Federal Tribunal found that the Turkish company had, in fact, detailed the discrepancy during the arbitration proceedings, and that the consequences of such difference in payment were both obvious and important. Thus, the Federal Tribunal ruled that “the arbitral tribunal did not abide by its minimum duty to examine the pertinent problems…By doing so, the arbitral tribunal violated [the Turkish company's] right to be heard.”

According to the new provisions of the IBA Rules, a witness is required to appear before the arbitral tribunal when his or her appearance has been requested by any of the parties or by the arbitral tribunal. However, at times it is permissible for the tribunal to hear witness testimony by videoconference (article 9.3.e). Article 4.8 of the rules formalizes a typical arbitral practice that developed because quite often witnesses cannot be heard due to time constraints. According to this new provision, the fact that the parties or the tribunal did not require the presence of a witness at the arbitral hearing does not mean that the parties have accepted the content of the witness statement.

Another important aspect of the new rules relates to the testimony of experts:

A similar provision to 4.8 described above is article 5.6; this article addresses expert witnesses. Specifically, it dictates that even where an expert is not demanded by the parties or the tribunal to appear at the arbitral hearing, that fact alone does not indicate that the parties/ tribunal members approve the findings of expertise.

Also related to expert testimony, according to article 5.2.c, experts are required to disclose their independence and, conversely, their links to any of the parties, members of the arbitral tribunal and the arbitration counsel. Practically, this can be a difficult provision as experts frequently consult with the same counsel in a variety of matters. Based on this provision and article 6.2, in such a circumstance where the expert has experience working with either of the counsel, the opposing party has grounds to call into question the expert’s expertise for the matter at hand. While difficult in practical terms, this provision plays an important role to ensure that experts are independent; this is highly important given the decisive impact experts’ testimonies can have on the final award.

The last remarkable change in the new rules relates to the exclusion of evidence for reasons of confidentiality or privilege.

Article 9.2 of the new rules is identical to the previous version, allowing for the exclusion of a piece of evidence due to a legal impediment or privilege. However, section 9.3 of the new rules sets a list of circumstances for the exclusion. For instance, documents made in connection with or for the purpose of providing or obtaining legal advice are excluded (article 9.3.a), as are any documents exchanged or produced in the course of a negotiation process (article 9.3.b). Another type of exclusion is for the non-respect of fairness and equality between the parties, or the circumstance where documents are not protected with the same intensity depending on the individual country’s legal system (article 9.3.e). A good example of this disparity in document protection is illustrated between France and the United Kingdom: under French law, documents communicated between a client and his counsel are protected by confidentiality, but that is not the case in the United Kingdom.

The revised IBA Rules related to witness and expert testimony are particularly useful guidelines for arbitration practitioners and arbitrators alike.

In order to transition varying legal traditions regarding the taking of evidence to a more cohesive approach, the International Bar Association (IBA) has been issuing rules dedicated to international arbitration since 1983. Commonly applied by arbitration practitioners because of the conciliation made between civil law tradition and common law tradition, these rules were revised in June 2010. The new IBA rules take into account new practices, precise former provisions and reflect some important technological breakthroughs.

It is important to stress that, unless the rules are contractually incorporated into the agreement by the parties, they are not mandatory for the parties or for the arbitrators. The purpose of the rules is to assist practitioners and arbitral tribunals, who often make reference to them as an interpretation standard.

One significant change in the new IBA Rules, as compared to the rules of 1999, is the recommendation to the arbitral tribunal to consult the parties on the taking of evidence at the earliest appropriate time and to encourage the parties to agree on an efficient, economical and fair process of the taking of evidence (article 2.1).

Another piece of advice, inherited from the principles of international arbitration, states that the parties must act in good faith with the taking of evidence throughout the entire arbitration procedure (preamble, paragraph 3). To that end, article 9(7) of the IBA Rules provides that the tribunal may increase the costs of arbitration for a defecting party, as well as any additional costs arising out of his or her bad faith behavior. The obligation to behave in good faith in the taking of evidence shall be taken seriously.

Other important changes to be noted relate to documentary evidence- specifically electronic evidence. Under article 3.12.b, the parties can maintain their documentary evidence in electronic form and must produce the evidence in the most economic and convenient manner possible.

“E-disclosure,” is defined as the process by which electronic data is searched before it is produced before a court or a tribunal. A request for production of documents will be admissible under article 3.3.a(ii) of the new 2010 Rules if the arbitral tribunal or opposing party identifies the specific documents and the search terms or any other means that would allow for an efficient and economical search of the documents. This new provision thus defines how precise the party’s or tribunal’s request should be. Its purpose is to prevent “fishing expeditions,” and at the same time, allow the party requesting specific electronic document to obtain it.

The revised IBA Rules are particularly useful guidelines for arbitration practitioners and arbitrators, reflecting a pragmatic, thoughtful approach to the taking of evidence.

The case involved a cross-license agreement originally between the claimant (a predecessor in interest) and Roche. A U.S. wholly-owned Roche subsidiary had used the licensed rights to develop diagnostic devices which it sold to a third party (also of US nationality). Claimant argued that the sales to the third party violated the license agreement.

Arbitration rights of non-signatories

The arbitral tribunal granted Roche’s customer, who had no contract with Claimant, the right to join as a party to the arbitration. The New York Court upheld that joinder decision. It held that a non-signatory, whose rights are closely intertwined with the disputed provisions of the contract that contains the arbitration clause may compel the signatory party that contests its rights to arbitrate their dispute.

Recovery of Legal Costs

Another important element of the Court’s ruling was its decision to uphold the Tribunal’s award of legal costs (including attorneys’ fees) to Roche and its US subsidiary. The Tribunal based the decision to award those cases based on Article 31 of the ICDR Rules, even though the place of arbitration was held in New York and applied New York law. The Court highlighted the Panel’s proper decision that the parties’ agreement to apply New York law to the arbitration was to be construed as a choice of law concerning the merits, and not concerning the allocation of legal costs. This is especially important where the parties had agreed to arbitrate under ICDR Rules and ICDR Rule 31 explicitly provides the arbitrators discretion in allocating legal costs between the parties.

One case, but it leaves us with two very important takeaways.

Nine times out of ten, one of the first questions we are initially asked by clients when we explain how international arbitration works is this: if we win the case, how can we be sure that the other side will pay, or that the award will be enforced?

Because international arbitration often involves parties from different countries resolving business disputes in a neutral country through a panel of independent “judges” (or arbitrators), people naturally believe that enforcing these decisions will be problematic, if not impossible. Not so. In fact, the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the “New York Convention,” addresses this very issue.

The adoption of the New York Convention on June 10, 1958 is widely recognized as a significant milestone in international arbitration. The Convention entered into force on 7 June 1959 and currently 144 countries have signed it. Countries that are signatories to the convention effectively agree to recognize arbitration agreements in writing and to refuse to litigate disputes subject to an arbitration agreement. Signatory states must also recognize and enforce arbitral awards.

In addition to the New York Convention, specific arbitral forums may have their own means for ensuring that awards are enforced.

The recognition and enforcement of an arbitral award is actually pretty easy and oftentimes more efficient than if the decision had been handed down by the Country’s own court, at least in the United States. In the United States court system, the losing party has the opportunity to appeal the decision, a process that can last a very long time. Conversely, awards decided through arbitration are binding and cannot be challenged, except in certain, limited situations.

To read the full text of the 1958 New York Convention, visit New York Convention.

Big news catching the eye of arbitration attorneys throughout the U.S. this week: The U.S. Supreme Court issued a decision in the Stolt-Nielsen, S.A. v. AnimalFeeds, Inc. case, addressing the hotly-contested issue of class arbitration. In a 5-3 split, the Court ruled that the Federal Arbitration Act (FAA) prohibits arbitrators from imposing class-action arbitration on parties whose arbitration agreement is silent on the question of class arbitration.

The background of the Stolt-Nielsen case is as follows: AnimalFeeds filed a class action lawsuit against Stolt-Nielsen and three other shipping companies alleging price-fixing and other antitrust violations. The parties jointly agreed that the arbitration agreement in their written contract was silent on the issue of class arbitration, and they both agreed to submit the question to a panel of arbitrators.

The arbitration panel unanimously concluded that the agreement allowed for class arbitration, but a district court later ruled that the panel had exceeded its powers in making that determination. The 2nd Circuit Court of Appeals reversed the district court’s decision, holding that, because the parties specifically agreed to have the arbitration panel decide on the scope of the clause, the arbitration panel’s decision to construe the arbitration clause as permitting class arbitration, “did not manifestly disregard the law,” and therefore, had not exceeded the panel’s authority.

The Supreme Court viewed things differently. In its decision this week, the majority concluded that, to impose class arbitration on parties who had not consented to it, was “fundamentally at war” with the FAA’s foundational principle that arbitration is a matter of consent. The Court further stated that class arbitration changes the nature of arbitration to such a degree that it cannot be presumed that parties agreed to it by simply agreeing to submit their disputes to an arbitrator.

So, what does this all mean? On a micro-level, AnimalFeeds may only bring its antitrust claims against Stolt-Nielsen S.A. on behalf of itself, and not on behalf of a class. However, the macro-level effects of this Supreme Court decision will undoubtedly extend much further: it is estimated that there are between 100 and 200 class arbitration actions currently pending in the U.S. Will defending parties in these actions use this decision to challenge the claims at issue? What impact will this decision have on the enforceability of class arbitration waivers? Will parties to arbitration contracts begin incorporating expressly-authorized class-wide arbitration clauses and will they be efficient? These questions will likely be answered in the coming months as the ripple of this decision plays out throughout the country. Stay tuned…