In-House Advisor: New Rules in Neutral Territory
Arbitration has become the default for corporations seeking international dispute resolution. In-house counsel, however, should keep in mind some of the peculiarities involved
IN JANUARY, TOKYO ELECTRIC POWER CO. (Tepco) cancelled a long-term uranium supply contract with Saskatoon-based Cameco Corp. on one day’s notice. Cameco said that there was no basis for the cancellation and that Tepco was in default. Under terms of the contract, the two parties entered a 90-day, good-faith negotiation period, to be followed by binding arbitration, if necessary.
Canadian corporations are increasingly using cross-border commercial arbitration as a way of resolving disputes without civil litigation. This trend is likely to continue as Canada tries to diversify its commercial relationships and depend less heavily on the US market.
For in-house counsel, it raises the question of whether arbitration should be their company’s default option in the event of a cross-border dispute. And if so, what arbitral conditions should be included in their contracts?
Records kept by one international arbitration body, the International Centre for Dispute Resolution (ICDR), show that it administered 126 arbitration cases involving at least one Canadian company in 2016, up from 104 the previous year. Data from the International Chamber of Commerce (ICC) show the number of Canadian firms participating in ICC-administered arbitration climbed to 57 in 2016, a record high and up from 35 in 2015.
“Canada and to a certain extent the US are a bit behind the curve on international commercial arbitration compared to Europe,” says Craig Chiasson, a partner at Borden Ladner Gervais LLP in Vancouver. “One of the big issues that draws people to international arbitration is whether the contracting parties are willing to trust the jurisdiction of one party’s courts or the other’s. Canadians and Americans historically have been fairly comfortable in each other’s courts.”
Now, however, as Canadian companies engage in more overseas transactions, the prospect of litigation in a foreign court looks more daunting. “A Canadian company doesn’t want to be dragged before a court in China if a dispute arises [with a Chinese company], says Vasilis Pappas, a partner at Bennett Jones LLP in Calgary. “And the Chinese company similarly doesn’t want to be dragged in front of a court in Canada. They’ll try to find a neutral forum with neutral decision-makers, and typically, that’s done by international commercial arbitration to resolve their disputes.” In other words, explains Pierre Bienvenu, a senior partner at Norton Rose Fulbright Canada LLP, “It’s the default choice for international dispute resolution.”
One of the key reasons for choosing international arbitration over litigation is greater ease of enforcement. Reciprocal enforcement of court judgments between jurisdictions is very limited. In contrast, the 1959 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, provides that international arbitration awards are automatically enforceable (with very narrow grounds for refusal) in every signatory country. (Angola became the 157th contracting state to the Convention in 2016.)
Canada went a step further than most contracting states and declared that all arbitral awards would be recognized and enforced in Canada according to the terms of the Convention, irrespective of whether the countries involved were signatories.
Another big advantage of arbitration is that the two parties can engage a tribunal with expertise in the subject matter of their contract. “For construction disputes, that’s something that parties will often choose to arbitrate, because it’s so complex and you can appoint arbitrators who have experience in construction law,” says Valérie Quintal, a litigator at Lax O’Sullivan Lisus Gottlieb LLP in Toronto.
Confidentiality is another appealing aspect of arbitration. Most sets of arbitration rules require that the arbitration be conducted in private with confidentiality. Public companies may have to make some disclosure in their regulatory filings, but proprietary information won’t be released publicly the way it might be in traditional civil litigation.
Unlike the situation in many courts, outsiders cannot access the case docket, written submissions or oral hearings in a typical commercial arbitration. This allows parties to address issues away from the glare of publicity, which may make it easier to settle the dispute.
Sometimes, however, arbitration is not the preferred approach to dispute resolution. “A party may decide on the courts instead of arbitration because a court ruling sets a precedent, whereas an arbitration award remains confidential,” says Quintal. “If my contracts are the subject of frequent disputes, I may feel that a body of law in front of the courts may benefit me in the longer term.”
Another circumstance less suitable for arbitration is multi-party contracts. “Where you have third parties that are potentially affected but are not around the negotiating table when the arbitration clause is negotiated, that can be a factor to prefer litigation,” says Bienvenu.
Consider a construction contract between an owner and a contractor. The contractor may have several subcontractors. The owner may sue the contractor over a defect for which the subcontractor is responsible. “The contractor can turn around and bring the subcontractor into the court case,” says Bienvenu. “In arbitration, that wouldn’t be possible unless there is an arbitration agreement binding the subcontractor to participate in such an arbitration.”
Another situation in which in-house counsel might think twice about arbitration is when the counter-party is a large, well-known company that frequently engages in arbitration. “Arbitrators like to be appointed,” says Pappas. “They may be a little more friendly to the large company because they want to be appointed in the future. I don’t want to overstate it, but it is a practice that some arbitration practitioners do bear in mind.”
If in-house counsel is going to rely on arbitration, they must ensure that the arbitration clause applies to the right counter-party. “Often, international companies incorporate a shell company,” says Chiasson. “Can you follow the money? It’s very difficult to bind a party that is not a party to the arbitration agreement to an arbitral decision. When a parent company has all the money but it’s their subsidiary that has entered into the contract, you may find out you’re chasing an empty shell.”
Bienvenu recommends a three-tiered process, beginning with good-faith negotiations, followed by mediation, and culminating, if necessary, in binding arbitration. “You need to have very clear deadlines, and very clear ability of either party to advance to the next stage. If there is poor drafting [of the dispute-resolution clauses], sometimes the whole process can be paralyzed. Or you get to arbitration and the first dispute is whether the prior steps were complied with. So there’s a drafting challenge [for in-house counsel] when you provide for these tiered dispute-resolution clauses.”
It used to be said that the benefit of arbitration over litigation was that the proceedings were faster and less expensive. That’s no longer axiomatic. “As less experienced counsel get involved in international arbitration, lawyers who are trained in court litigation are picking up arbitration files and treating them in a manner similar to arbitration files,” says Chiasson.
The result has been broader discovery, larger damages sought, much larger submissions, greater reliance on experts and their testimony, and more procedural challenges to the arbitration. Some legal pundits refer to the trend as “judicial creep” or the “Americanization” of international arbitration.
The 2015 Survey conducted among in-house counsel and other stakeholders by the School of International Arbitration at Queen Mary University of London found that “cost” is seen as international commercial arbitration’s worst feature, followed by “lack of effective sanctions during the arbitral process,” “lack of insight into arbitrators’ efficiency” and “lack of speed.”
Nevertheless, says Chiasson, “I think for a Canadian company, you can certainly get through a complex international commercial arbitration faster than you can get through most provincial courts.”
“International arbitration is less streamlined than it used to be,” says Pappas, “but it’s certainly more streamlined today than a traditional civil litigation.” For a very complicated case, an arbitration, from start to finish, would take two to three years, whereas a civil litigation involving a comparable dispute can take many years, he says. For a relatively simple case, an arbitration can often be completed within a year.
Some of the organizations have taken steps in recent years to streamline their procedures. The ICDR advertises expedited procedures providing for a sole arbitrator in cases where no disclosed claim or counterclaim exceeds US$250,000; a streamlined exchange of information; the exclusion of US litigation procedures from information gathering; and a time limit for the issuance of the award from the closing of the hearing.
Similarly, the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules, often used for disputes where no arbitral institution is involved, were revised in 2010 to be more cost-effective. Innovative features were added to the rules in order to enhance procedural efficiency, including revised procedures for the replacement of an arbitrator, the requirement for reasonableness of costs, and a review mechanism regarding the costs of arbitration.
“One way of controlling costs — and the process — is for in-house counsel to remain involved” in the process, says Bienvenu. “In my experience, the costs of arbitration are very much a function of the case-management abilities of the arbitrator. It’s important for parties, through the presence of their in-house counsel at hearings, to convey their expectations of case management. That has a huge impact on cost.”
Canadian in-house counsel, when considering international commercial arbitration, often select one of the large, experienced organizations such as the International Chamber of Commerce, based in Paris, the London Court of International Arbitration, based in London, or the ICDR, which is the international arm of the American Arbitration Association.
There are also regional forums that do cross-border arbitration, e.g., the Hong Kong International Arbitration Centre, the Singapore International Arbitration Centre, the Arbitration Institute of the Stockholm Chamber of Commerce, the ADR Institute of Canada in Toronto, and the British Columbia International Commercial Arbitration Centre in Vancouver.
Which institution, if any, in-house counsel should choose to administer the arbitration “is a very personal preference,” says Quintal. “The sets of rules do look very similar. Much depends on the chair of the tribunal. They may be very hands-on and give a lot of direction. Or they may give great latitude to the parties involved.”
“You can choose any rules to apply to any arbitration anywhere,” says Chiasson. For example, Canadian and Australian disputants might agree upon the London Court of International Arbitration and use its rules of procedure but have the merits of the dispute settled according to Australian law. The permutations and combinations are almost unlimited.
The ICC Court of Arbitration is based in Paris, but only a third of ICC arbitration hearings occur there. The remainder take place at ICC-related venues in over 60 other countries. Similarly, while London is the location of the LCIA’s headquarters, more than 80 per cent of the cases referred to the LCIA do not involve UK parties.
Sometimes parties to a dispute opt for ad hoc arbitration, meaning no institution administers the proceedings. The 2006 Queen Mary Law School / PwC international arbitration survey found that 76 per cent of responding businesses favoured institutional arbitration over ad hoc arbitration. The 24 per cent that preferred ad hoc arbitration were companies with annual revenues above US$5 billion. In many cases, these companies have large, sophisticated in-house legal teams with experience managing arbitration proceedings.
Many in-house counsel have a standardized arbitration clause to insert in their international contracts. This is especially recommended when a transaction with a foreign company includes many contracts. It’s common, for example, in a joint venture agreement to have many ancillary contracts. “My advice would be to ensure that the arbitration clause in each contract is identical,” says Pappas.
“You might end up in a situation where you want to consolidate the arbitration under one contract with the arbitration under another contract,” he says. “The only way in which that will be even remotely possible is if each of the contracts has an identical arbitration clause.”
Most of the arbitration institutions have standard clauses that they recommend for arbitration under their rules. However, Quintal warns against adopting boilerplate text. “You shouldn’t necessarily use the clause that applied to the last dispute for the next one. You should tailor the clause to the situation. You should think about what types of disputes might arise under your contract.”
Sven Deimann, Legal Counsel for Bombardier Transport in Berlin, says his company’s participation in international commercial arbitration has usually been under the auspices of the International Chamber of Commerce (ICC). He has also been involved under the Zurich Chamber of Commerce (International Arbitration Rules) and the German Institution of Arbitration (DIS).
In one of the company’s large arbitrations several years ago, the arbitral agreement stipulated Geneva as the seat, but most of the hearings were held in Paris to make use of the ICC’s conference facilities. “As for the substantive law used in the arbitrations,” he says, “this has usually been a function of where the underlying transaction for the sale of rail technology took place.” Very often, because of the public tendering process, Bombardier doesn’t get to choose the seat of an arbitral tribunal or the substantive law that will apply.
“If the contracts are for standard sales of equipment outside of a tendering process governed by public procurement laws,” Deimann says, “then we would typically try to insert standard [arbitration] clauses. In other contexts, especially if the contract is the outcome of a competitive tendering process governed by public procurement law, it is more common for the tendering entity or authority to insist on their standard dispute-resolution clauses.”
As for the speed and cost of proceedings, says Deimann, “Over the last ten years, we have really experienced both extremes: lengthy, virtually endless proceedings — in one instance it took close to nine years from the request for arbitration to settlement of the award as to costs — and ballooning costs for counsel, but also for the arbitrators and fees for the institution. [But we have also experienced] extremely expeditious proceedings that came at reasonable arbitrator and institutional fees.”
Lyle Braaten, Legal Counsel for Lumina Gold Corp., has been through three international commercial arbitrations in eight years, each under the auspices of the Stockholm Chamber of Commerce (SCC). Two of the arbitrations were heard in Reykjavík and the third in Madrid at the request of the chair of the arbitration panel.
The disputes centred on the Icelandic subsidiaries of North American companies: one, a Canadian company with a majority interest in an Icelandic electricity producer; the other, a US company with a majority interest in an Icelandic aluminum smelter. The first arbitration took two years; the next two, a year and a half each.
Each of the contracts had a customized arbitration clause that stipulated they would be governed by Icelandic law. These clauses were prepared by Icelandic lawyers. Both arbitration clauses mandated the SCC, because the Icelandic lawyers who drafted the clauses were most familiar with that institution.
“One of the main advantages is that we were able to select arbitrators who had the necessary expertise rather than rely on judges,” Braaten says. “The chances of getting a judge in Iceland who dealt with commercial issues, let alone electricity and smelting, were small.”
He was disappointed, however, that arbitration was actually more expensive than he estimates litigation would have been. “It’s supposed to offer speed, but when you’re picking quality arbitrators you’re subject to their schedules. They’re busy, and you can’t expect extraordinary speed.”
In arbitration, the parties appoint the arbitrators first and then you consider their schedule. “I think it should be the other way around,” says Braaten. “‘What’s your availability to hear this dispute and then we’ll appoint you.’”
Braaten is pleased, though, that the grounds for appeal of arbitral rulings are limited. “You may wait longer than you’d like for a decision, but once you get a decision, you’re pretty well assured that there’s going to be no appeal. In a traditional litigation you can wait a year and a half to two years for your hearing, a year for your decision, and the parties can appeal it, which will take another two years. If you add it up, arbitration does provide relative speed. I am happy with relative speed.”