Guide to International Arbitration: When to Choose It, How to Pick the Rules and Seat, and What to Put in the Clause

Oct 1

9 min read

This post is based on the Guide to International Arbitration (May 2014), published by Latham & Watkins LLP, the global law firm’s international arbitration practice. All credit for the framework, analysis and checklists summarised here goes to the authors at Latham & Watkins. Please note that the guide is a 2014 publication, so treaty and institution figures and some institutional rules have been updated since, and readers should verify current rules before relying on them.

Every cross-border contract raises a quiet but expensive question: if the relationship breaks down, who will decide the dispute, where, and under what rules? The guide argues that this decision belongs at the drafting stage, because once a dispute arises, self-interest usually makes agreement impossible. Here is its practical roadmap.

What Is Arbitration?

The guide describes arbitration as a private, binding form of dispute resolution before an impartial tribunal. It begins from the parties’ agreement but is regulated and enforced by the state. Tribunals have one or three arbitrators, who are usually chosen by the parties directly or through an institution, and who are generally bound to apply the applicable law unless the parties empower them to decide on fairness. They must follow due process and give each side a proper chance to present its case.

The guide also draws two useful distinctions:

Arbitration versus mediation: Mediation and similar methods, often grouped under alternative dispute resolution, are non-binding. Unless the parties settle, they must still go to a binding process such as arbitration or litigation.
Arbitration versus expert determination: Arbitrators decide mainly on the parties’ submissions and the applicable law, while experts use their own knowledge. Arbitration is regulated by national arbitration laws and benefits from enforcement conventions, whereas an expert’s decision has only the force of contract and must be enforced by a fresh action for breach of contract.

Why Choose Arbitration? The Features That Decide the Question

The guide stresses that whether a feature is an advantage depends on a party’s objectives. It lists the features that most often prove decisive:

Enforceability: Under the 1958 New York Convention, which the guide says had more than 145 state parties, awards are enforceable across borders subject only to limited grounds of objection. There is no equally wide convention for court judgments. This often settles the choice for international contracts.
Neutrality: A party can avoid the local courts of its counterparty and use a mutually acceptable venue with a multinational tribunal.
Confidentiality: Arbitration offers more privacy than court litigation, and parties can add express confidentiality terms, although court enforcement can later put confidentiality at risk.
Expertise: Parties can pick arbitrators with relevant industry or legal experience, rather than risking a judge with none.
Procedural flexibility: Rules are simpler and easier for parties of different nationalities, though the lack of detailed rules can cause debate over procedure if parties do not agree in advance.
Choice of arbitrators: Most developed laws require impartiality, but parties can influence selection to get a tribunal that understands the commercial context.
Cost: There is no simple answer. Legal fees dominate in both systems. Arbitration adds fees for arbitrators, institution and venues, but has no court fees and usually no merits appeal, which can save years.
Interim relief: Tribunals can often grant preliminary relief, but they cannot impose criminal sanctions, so rules and laws commonly let parties seek interim relief from courts.
Joinder: Adding parties or related disputes generally needs everyone’s consent, so the guide advises building joinder provisions into the agreement in advance.

The Tribunal: One Arbitrator or Three?

A sole arbitrator is generally cheaper and faster, but then the parties cannot each nominate one, and everything rests on a single decision-maker. For high-value and complex disputes, three arbitrators are usual. With three, each side normally nominates one and the chair is chosen by those two arbitrators or by an appointing authority or court. Parties can also require qualities such as years of practice or particular experience, though arbitrators need not be lawyers.

The guide also explains how experienced counsel advise on candidates, looking at familiarity with the governing law and rules, background and industry experience, language and seat, writings and past awards, reputation, and the candidate’s likely influence on the chair and deliberations.

Choosing the Arbitration Rules

Rather than draft a procedure from scratch, parties usually adopt ready-made rules. The guide compares three leading institutions:

ICC International Court of Arbitration: Paris, founded in 1923, probably the best known. Its procedure is more actively administered, with Terms of Reference and scrutiny of draft awards by the ICC Court. Its fees depend on the amount in dispute and require advances.
London Court of International Arbitration: London, founded in 1892, with affiliates in Dubai, India and Mauritius. It is lightly administered, and its fees for itself and arbitrators are based on time spent, at rates generally lower than arbitrators would charge directly.
International Centre for Dispute Resolution: The international arm of the American Arbitration Association. It is lightly administered. Its administrative fees depend on the amount in dispute, while tribunal fees follow time spent.

UNCITRAL Rules and ad hoc arbitration. The UNCITRAL Rules were developed as a neutral alternative and have no administering institution, so parties should name an appointing authority in advance. If none is named and appointments break down, the Secretary General of the Permanent Court of Arbitration in The Hague designates one. The guide warns that purely ad hoc arbitration under a national law often leads to disagreement and delay and increases court intervention. Although it might look cheaper, institutional administration and lower arbitrator rates can outweigh the savings in large disputes.

Specialist bodies. The guide also mentions the International Centre for the Settlement of Investment Disputes for investor and state disputes, the WIPO Arbitration and Mediation Center for intellectual property, and the China International Economic and Trade Arbitration Commission, which many Chinese counterparties insist upon.

Overall, it concludes that the ICC, LCIA, ICDR and UNCITRAL rules are largely interchangeable and can be used wherever the arbitration takes place, with some drafting adjustments depending on the rules chosen.

The Seat of Arbitration

The seat is the legal place of arbitration, and it is distinct from where hearings physically take place. The seat determines the procedural law and the court that supervises the arbitration, for example, London brings in the English Arbitration Act 1996. The guide describes arbitration-friendly centres such as London, New York, Paris, Hong Kong and Singapore as having few mandatory rules, giving parties freedom over counsel, procedure, language and tribunal, and keeping courts to a supportive role. By contrast, less arbitration-friendly countries may have more interventionist courts and restrictions such as requiring local lawyers.

The seat also matters for enforcement. Choosing a seat in a New York Convention state gives considerable scope for enforcing the award in other contracting states.

Typical Steps in an Arbitration

A substantial international arbitration typically includes most of these steps, some overlapping:

Request for Arbitration by the claimant, and the respondent’s Answer, with any counterclaim.
Appointment of the tribunal and a procedural hearing to fix the timetable.
Full statements of case, defence and counterclaim, and replies.
Disclosure of documents relied upon, or often very limited requested categories.
Exchange of witness statements and expert reports, a meeting of experts and a joint statement of agreed and disputed matters.
Pre-hearing submissions, the hearing, post-hearing submissions and the award.

For a substantial and complex dispute, the guide says arbitration typically takes about 12 to 18 months from commencement to the final hearing, though this can vary with procedure, tribunal availability and party conduct.

Drafting Checklist for the Arbitration Clause

The guide notes that model clauses from the ICC, LCIA, ICDR and UNCITRAL are very basic and may need adapting. Its checklist of points to consider includes:

Pre-arbitration mediation: Providing for it in advance avoids the perception that proposing it later is a sign of weakness.
Option clauses: A clause letting a party choose between arbitration and courts needs careful analysis, because under some laws such clauses can invalidate the arbitration provision.
Capacity and authority: Check that parties and signatories can bind themselves. Some laws require government entities to get approval first.
Mandatory requirements: The governing law, seat or place of enforcement may impose form requirements, especially with governmental parties.
Scope and arbitrability: Clauses are usually drafted broadly, but some disputes may not be arbitrable under the applicable law as a matter of public policy.
Tribunal powers: Consider whether to bar punitive damages, allow decisions on documents alone, or allow decisions on fairness.
Procedural rules and disclosure: Consider amending the rules. For example, the ICC and LCIA rules exclude merits appeals, while the UNCITRAL Rules do not, so a separate exclusion may be needed. Consider also the IBA Rules on the Taking of Evidence.
Language, governing law and seat: State them expressly, and check that a governing law clause does not contain a court submission inconsistent with arbitration.
Confidentiality: Do not assume the rules or law will protect it, and provide expressly.
Court powers and appeals: Courts usually support the arbitration and have limited review powers. Challenges for lack of jurisdiction or procedural irregularity are usually mandatory, but appeals on points of law can often be excluded by agreement.
Multi-party and multi-contract issues: The usual one-arbitrator-each method fails with three or more parties, and the guide notes concerns in France about forcing multiple parties to agree on a single arbitrator. An umbrella arbitration agreement can allow consolidation and joinder across related contracts.
State immunity: Where a state or its instrumentality is a party, seek an express waiver of immunity from enforcement, since signing an arbitration agreement is often treated as waiving immunity from suit only.

Arbitration Between Foreign Investors and States

The guide closes with investor-state arbitration under bilateral investment treaties, noting that more than 2,500 had been concluded. These treaties protect investors from one state investing in another, and usually provide for arbitration even where the investor has no contract with the host state, which is called arbitration without privity. The most common are ICSID arbitration and ad hoc arbitration under the UNCITRAL Rules.

Core protections common to most treaties, as the guide lists them:

Protection against expropriation without prompt, adequate and effective compensation, including actions tantamount to expropriation.
Fair and equitable treatment and full protection and security, against arbitrary, deliberate or grossly careless state action, including a denial of justice.
Non-discrimination, including national treatment and most-favoured-nation treatment.
Free transfer of funds into and out of the host state.
Direct access to international arbitration against the host state.

The key lesson is timing. The guide advises that the time to consider treaty protection is when the investment is structured, for example by considering whether to invest through a subsidiary in a state that has a comprehensive treaty with the host state, and whether an offshore vehicle is actually covered by the treaty.

Key Takeaways

Decide on dispute resolution at the drafting stage. Tribunals get their power only from the parties’ agreement.
Enforceability under the New York Convention is often the deciding factor for international contracts.
The seat controls the procedural law and court supervision, so choose it deliberately and separately from the hearing venue.
Institutional rules are largely interchangeable but differ in administration and fees, so match them to the dispute’s size and complexity.
Model clauses are only a starting point. Adapt them for confidentiality, appeals, joinder, language, governing law and immunity.
Foreign investors should plan treaty protection when structuring the investment, not after a dispute arises.

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Frequently Asked Questions

1. Why is arbitration often preferred over court litigation for international contracts?

The main reason is enforceability. The New York Convention allows awards to be enforced in many countries with limited grounds of objection, while there is no equally wide convention for court judgments. Neutrality, confidentiality and expert arbitrators are other common reasons.

2. What is the difference between the seat and the venue of arbitration?

The seat is the legal place of arbitration, which determines the procedural law and the courts that supervise it. The venue is where hearings physically take place, which may be different for convenience.

3. Should an arbitration have one arbitrator or three?

A sole arbitrator is usually cheaper and faster. For high-value or complex disputes, three arbitrators are generally used, with each party normally nominating one and the chair chosen by those two or by an appointing authority.

4. What is the difference between institutional and ad hoc arbitration?

Institutional arbitration is administered by a body such as the ICC, LCIA or ICDR. Ad hoc arbitration has no administering institution and often follows the UNCITRAL Rules or a national law, which can bring more disagreement, delay and court intervention if the clause is weak.

5. Can a foreign investor arbitrate against a state without a contract?

Often yes. Under bilateral investment treaties, investors can usually bring claims against the host state directly in international arbitration, even without a contract with it, which is known as arbitration without privity.

Keywords

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