Jonathan C. Hamilton, “Managing Risks through International Dispute Resolution” (2008)

Arbitration is now widely accepted as a preferred alternative for cross-border business, but that generalized acceptance masks the numerous and important differences between domestic and international arbitration that should be taken into consideration in the structuring and handling of disputes arising from cross-border transactions. It is critical to consider relevant legal frameworks, structuring dispute mechanisms, managing disputes and practical issues related to the importance of international dispute resolution to risk management in cross-border transactions.

Why should business executives doing business across borders care about dispute resolution?  Because it is central to the management of business risks.  It is de riguer for counsel to consider at the time of contract the mechanism for resolving possible disputes—often as afterthought or through resort to boilerplate language.  In the cross-border context, that may not be enough.

For commercial transactions, concerns of neutrality, efficiency and enforcement are paramount.  These concerns can be addressed through the dispute resolution mechanism agreed through contract; but complex risks require more thorough assessment of dispute mechanisms.  In addition, business opportunities abroad, particularly in emerging markets, give rise to concerns about local laws and regulations and the risk of state action and intervention.  These concerns, while often present, are not always sufficiently addressed at the time of a transaction, when an investment usually can be structured to enjoy the protections of an investment treaty that gives recourse to claims against the host state.

Arbitration is now widely accepted as a preferred alternative for cross-border business, but that generalized acceptance masks the numerous and important differences between domestic and international arbitration that should be taken into consideration in the structuring and handling of disputes arising from cross-border transactions.  This chapter sets out a collection of comments on special issues that arise in the context of international dispute resolution.  It addresses relevant legal frameworks, structuring dispute mechanisms, managing disputes and practical issues related to the importance of international dispute resolution to risk management in cross-border transactions.  It focuses, as a particular point of reference, on Latin America.

The Legal Framework for Alternative Dispute Resolution across Borders

Arbitration laws and treaties are the foundation for structuring the dispute mechanisms for international business.  Historically, the lack of recourse to neutral dispute mechanisms was a serious impediment to international business.  In Latin America, for example, the prevailing policy toward foreign investment disputes was embodied in the nineteenth century Calvo Doctrine, named for an Argentine diplomat.  That doctrine held, in short, that jurisdiction in international commercial disputes lies within the country in which the investment is located.

After a history of hostility toward arbitration, emerging markets worldwide have transformed the legal framework for arbitration in the region over the past decade or so.  With respect to commercial arbitration, numerous countries, including in Latin America, have modernized their arbitration laws, usually based on the UNCITRAL Model Law on International Commercial Arbitration.  Most countries have ratified the 1958 United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and, in Latin America, the 1975 Intern-American Convention on International Commercial Arbitration (Panama Convention).

With respect to investment arbitration, most states have ratified the Convention on the Settlement of Disputes between States and Nationals of Other States (ICSID Convention) and many have concluded multiple bilateral investment treaties (BITs), free trade agreements or multilateral conventions allowing investment disputes with host states to be submitted to arbitration.  Dramatic change came in the 1990s as Latin American economies liberalized and states agreed to new mechanisms for dispute resolution.  They collectively ratified almost 400 BITs and free-trade agreements.  The North American Free Trade Agreement (NAFTA) and the Free Trade Agreement between the United States, the Dominican Republic and Central America (DR-CAFTA), for instance, each include special chapters for the promotion and protection of investment.

To illustrate, the legal framework for arbitration in Latin America is reflected in the Compendium of Latin American Arbitration Law that I have compiled over many years.  The compendium indicates the entry into force of laws and treaties related to the arbitral framework across each Latin American jurisdiction, both with respect to commercial and investment arbitration.

Regarding commercial arbitration, the compendium notes whether each country has ratified the New York and Panama Conventions and the year of ratification, and notes the year in which each country’s current arbitration law was passed.  Regarding investment arbitration, the compendium notes whether each country has ratified the ICSID Convention, and lists the number of BIT’s and free trade agreements ratified by each country that provide for international arbitration of investment disputes.

In addition, an assessment of the enforcement of laws and treaties in relevant jurisdictions is also relevant to structuring dispute resolution mechanisms and managing disputes that have arisen.  The seat of the arbitration is critically important because it determines where the arbitral award will formally be rendered as well as the jurisdiction whose laws will govern the arbitral proceedings and the enforcement of the award.  Jurisprudence is relevant to the selection of a seat of arbitration where courts are not likely to interfere and the assessment of likely enforcement proceedings in jurisdictions where the parties to a transaction have assets.

A review of decisions across Latin America, for instance, demonstrates the application of modern arbitration laws by courts historically perceived as hostile to arbitration.  While some Latin American courts have made and will make spectacularly bad decisions that appear to undermine arbitration, many courts are getting it right.  We also have to keep in mind that the same trend of mostly successful enforcement (with some aberrations) remains true even in pro-arbitration jurisdictions like the United States.  Outlying cases should not be taken as a sign that arbitration in Latin America will or has failed.

In Peru, for instance, the Constitutional Court has affirmed a commitment to arbitration as an effective means of dispute resolution, further consolidating a legal framework developed over the past two decades.  See Fernando Cantuarias Salaverry, Decision of the Peruvian Constitutional Court, February 28, 2006, EXP No. 6167-2005-PHC/TC, Part IV Section 1.  The Cantuarias court sustained the independence of the arbitral tribunal, holding that constitutional review of an award should be limited to determining arbitrators’ potential disregard of constitutional jurisprudence or procedural guarantees.  The record across Latin American jurisdictions, as in Peru, demonstrates a general trend in favour of arbitration, but with noteworthy exceptions.  That is why a jurisdiction-specific assessment is required.

The Advantages of Arbitration in Cross-Border Transactions

One of the problems inherent in cross-border transactions remains ensuring the equitable resolution of disputes where the parties are from different countries.  Key considerations include neutrality, efficiency, and enforcement.

Neutrality is a foremost consideration because national courts may be perceived to be biased or hostile.  The importance of neutrality is also increased because most companies are understandably skeptical of proceedings held on foreign soil.  In turn, most foreign governments are reluctant to resolve their disputes in the courts of any foreign country, especially a country home to the opposing party.

As to efficiency, it would be hyperbole to suggest that international arbitration is necessarily more cost-effective than U.S. litigation.  Yet, unlike traditional litigation, arbitral proceedings are not bound by court rules and procedures.  Rather, many of the rules and procedures in an arbitration can be established by agreement of the parties.  This results in considerable flexibility and the opportunity to achieve greater control over costs.  For instance, the parties may require that any international arbitration disputes be expedited and be completed within a given amount of time.  There also is the possibility of agreeing to limit the scope of discovery or forego the option of having oral argument in addition to written submissions.  The more critical aspect of efficiency is not the issue of cost but of time.  The comparable option often is not U.S. litigation but disputes in the courts of emerging markets, where in worst-case scenarios it can take years even to serve notice on a defendant.

Enforcement is critical because dispute resolution ultimately depends on enforcement, whether you are attempting to enforce an arbitration award or a judgment by a domestic or foreign court.  If one party does not have confidence in an opposing party’s capacity to enforce an award or judgment, it is less likely to comply.  There are no treaties governing, for instance, the enforcement of a New York judgment in Latin American courts.  In contrast, the New York and Panama conventions encourage enforcement of arbitration awards.  Reference to the legal framework in relevant jurisdictions is critical.

Structuring Investments to Benefit from Treaty Protections and Recourse to Arbitration

Apart from the mechanisms for resolving commercial disputes, international business transactions also may ultimately, if unexpectedly, give rise to potential claims against foreign states either because the other party to the contract is a state or state entity, or because the state ultimately takes steps that impair the investment in violation of relevant protections under international law, such as in cases of nationalization or expropriation.  It is thus advisable to structure investments in foreign jurisdictions so that they fall under the coverage of bilateral or multilateral investment treaties.

Arbitration requires the consent of the parties.  In a contractual arbitration agreement, all the parties to the transaction are choosing to opt out of conventional litigation and instead are choosing to resolve any disputes by arbitration.  The process of determining consent is often relatively straightforward when the parties explicitly include such an arbitration agreement in a cross-border contract.  What is less commonly known and understood is that consent to arbitration may also be provided in an investment treaty.

Under investment treaties, the signatory parties agree to provide certain protections and to promote foreign investments from the other parties.  In order to enforce this exchange of investment promises, these bilateral and multilateral investment treaties often contain a provision permitting foreign investors from a signatory country to initiate an arbitration directly against the host country in the event that one of the treaty obligations was not complied with under international law.  In other words, each country essentially provides its consent to arbitrate investment disputes brought by a foreign investor from another country that is a part of this treaty.  Although the arbitration agreement is contained in an international treaty, practically speaking, the effect of this statement is identical to that of a contractual obligation to arbitrate.

In an arbitration arising from a treaty, when the aggrieved party – for instance, a foreign investor in a Latin American jurisdiction wants to bring claims, that foreign investor must consent in writing and essentially accept the offer to arbitrate disputes arriving under the treaty.  Because the country in question has already agreed, under a treaty, to arbitrate all disputes with foreign investors, an agreement similar to those borne of contractual arbitration clauses is created.  While there may still exist a number of jurisdictional issues that must be worked out prior to the agreed upon arbitration, this example illustrates the way in which sovereign states may become subject to arbitrations under treaties.

Surveying Investment Arbitration

The combination of a legal framework for investment disputes and subsequent frustrations of foreign investors led to an explosion in Latin American investment arbitration.  Out of 254 ICSID arbitrations filed in four decades, only 25 percent of the concluded cases were brought against Latin states; now more than 50 percent of ICSID cases are pending against Latin American states.  Venezuela, for instance, has ratified twenty-two BIT’s and faced a number of ICSID cases, including most recently claims by Exxon Mobil Corp. and ConocoPhillips relating to oil-production facilities and assets.

ICSID registered the first request for arbitration against a Latin American state in the Santa Elena v. Costa Rica case (White & Case advised on that case).  Through early 2008, there were a total of forty ICSID cases concluded against Latin American states, a significant pool that informs our understanding of investment disputes.  Out of those forty ICSID cases, fifteen were settled or discontinued at the request of one of the parties; five were dismissed on jurisdiction, and twenty were decided on the merits.  Of the fifteen settled, eight were against Argentina, mainly involving energy and infrastructure projects.

The five cases dismissed on jurisdictional grounds include one against El Salvador.  In that case, the tribunal found that the claimant’s “investment was made in a manner that was clearly illegal.”  In another case, which involved a pasta factory near Peruvian wetlands, the tribunal acknowledged judicial irregularities in the Peruvian courts, as the claimant alleged, but dismissed it nonetheless based on the non-retroactive nature of the BIT.

Twenty of those forty cases have been decided by ICSID Tribunals on their merits.  In five cases, the claims were dismissed in their entirety.  The remaining fifteen have been decided with at least some of the claims alleged being granted by the tribunal.  Notably, in cases decided on merits, 70 percent of claims for a breach of “fair and equitable treatment” have been successful.  In contrast, only 30 percent of claims for expropriation have been successful.

These outcomes illustrate the maturation of a system that aims to reduce the risk of cross-border business by promoting legal certainty.

Role of Counsel

Retaining competent and experienced arbitration counsel is important for the proper structuring of a cross-border transaction, the drafting of an appropriate dispute resolution provision, and the handling of any dispute that may arise.  Given the unique nature of international arbitrations, there are a number of qualifications that clients should look for in selecting legal counsel.

First, the legal counsel should demonstrate expertise in handling international arbitrations in relevant arbitral fora.  International arbitrations are administered by a number of institutions throughout the world.  Many disputes relating to foreign investment, particularly in emerging markets, are not necessarily resolved in only one forum.  Instead, these disputes sometimes involve arbitrations with multiple phases.  Often, one project can spawn several disputes that must be arbitrated.  As such, legal counsel with experience before numerous arbitral institutions will be in a better position to deal with these large and complex disputes.

Second, it is common in an international arbitration to have parties and arbitrators who come from different legal cultures.  This divide must be bridged in nearly every case, because most disputes are multi-faceted.  They require consideration and assessment of public international law, civil law, and common law issues, all in more than one language.  They also involve consideration of industry practices and trade usages.  And they often require coordination with public officials.  One clear example of the prominent differences between various legal cultures is the diversity of opinions and assumptions related to discovery or production of documents.  It is typical in the U.S. to request and receive access to numerous documents from an opposing party, to help in investigating and developing a case.  That practice is uncommon in civil law jurisdictions.  As a result, companies should seek out arbitration counsel who are experienced with these important differences.

Third, given the nature of international business transactions and international dispute resolution, successful arbitration counsel likely will possess multicultural skills that enhance their ability to relate to and communicate across legal cultures.  It is often helpful for international arbitration counsel to have a capacity for foreign languages, experience doing business abroad, training in more than one legal culture, or some exposure to both civil law and common law.  In my case, for example, I worked as a visiting associate with a top law firm in Peru and, after starting my career in the New York office of White & Case, I worked for several years in our firm’s Mexico City office.  When a lawyer is exposed to the legal education or the practice of law in a foreign country, or both, it helps the lawyer better understand the risks that clients face and ways to manage the risk of doing business in foreign jurisdictions.  Cultural and linguistic skills are no substitute for substantive capacity and experience.  Rather these qualifications must go hand-in-hand as language skills without substantive focus are insufficient.

Conclusion

Alternative dispute resolution generally, and international arbitration in particular, is best understood as part of a toolbox of dispute resolution mechanisms that may include providing for and ultimately managing a hybrid of mediation, arbitration, treaty disputes, litigation, enforcement proceedings, negotiations and settlements—sometimes all at once.  Enforcement issues persist and different dispute mechanisms are more suitable or reliable than others depending on the nature of the dispute, the relevant industry sector, and the enforcement strategy.  Alternative dispute resolution is not a panacea, but it is indispensable.

Alternative dispute resolution generally, and international arbitration in particular, is best understood as part of a toolbox of dispute resolution mechanisms that may include providing for and ultimately managing a hybrid of mediation, arbitration, treaty disputes, litigation, enforcement proceedings, negotiations and settlements, sometimes all at once. 

Jonathan C. Hamilton