What is arbitration?

When you’re doing business abroad, it’s important to know what happens if your collaboration falls apart or if any damage occurs. In which country and how and by whom will it be solved? There are multiple means of dispute resolution. You can try to solve the problem through negotiation, possibly with the help of a professional mediator. If the parties cannot reach a solution, or in case binding decisions are required, there are two possible paths to follow: state court litigation or arbitration. Arbitration is becoming increasingly popular in the international business world. But what does arbitration exactly entail?

Characteristics of arbitration

Arbitration has some advantages over state court litigation. Parties may not want to be subjected to the ‘normal’ courts, as facing the court of their business partner’s country could be considered a disadvantage to some. Commercial arbitration cases are not handled by a national judge, but by one or three arbitrators who have been selected by the parties themselves (the arbitral tribunal). Parties can choose the seat of the arbitration and it’s even possible to move to another location in the course of the proceedings, should that be better suitable given the different locations of parties, arbitrators and experts. In short, the arbitration process is much more flexible than court proceedings. The process is also confidential, with proceedings behind closed doors. The arbitral award will only be made public if the parties grant permission. As arbitrators experienced people can be chosen by the parties themselves, based on for example their expertise knowledge in a certain field, their specific qualifications or their (neutral) nationality.

International arbitration institutes

To safeguard a good arbitration process, it is recommended to arbitrate at an established arbitration institute. Such institutes have ‘Arbitration Rules’, which act as clear guidelines for the entire proceedings, from the filing for arbitration up to and including the final arbitration award. The arbitration institute can also assist in selecting suitable arbitrators. Historically, the largest arbitration institutes are found in Europe, with the London International Court of Arbitration (LCIA) and the International Chamber of Commerce (ICC) in Paris being the largest. New York City has the International Centre for Dispute Resolution (ICDR). In Africa, the Organization for Harmonization of Business Law in Africa (OHADA) is becoming increasingly important. In Asia, the most well-known institutes for commercial international arbitration are based in Singapore (Singapore International Arbitration Center, SIAC), Hong Kong (HKIAC) and China (International Economic and Trade Arbitration Commission, CIETAC). The Malaysian Kuala Lumpur Regional Center for Arbitration (KLRCA) is considered a rising star in this field.

No appeal and internationally enforcable awards

An important aspect of arbitration is that after an arbitration award has been rendered, no appeal can be made on the merits. This prevents endless litigation in several stages. Equally important is the enforceability of an arbitration award. When the winning party has to go and obtain his awarded compensation in another country, the process can actually be easier if it concerns an arbitration award than if it concerns a verdict from a national court. The New York Convention of 1958, which is signed by most countries worldwide, facilitates enforcement of an arbitration award in member states and describes only a limited number of grounds for refusal of enforcement of arbitral awards. If it concerns a verdict from a foreign court, the enforcement can be much more complicated, unless there is a treaty between the countries on the reciprocal recognition of state court verdicts. To give a clear example, enforcing a verdict from a Malaysian court in the Netherlands is much more complicated than enforcing an arbitration award that was made under the rules of the KLRCA.

Fast procedure?

If both parties and the arbitrator(s) collaborate, arbitration can be faster than court proceedings. Some arbitration institutes have set up special rules for quick and short proceedings. The KLRCA has drafted the Fast track Arbitration Rules, according to which a final arbitration award is made within 160 days of the start of the arbitral proceedings. Singapore and Hong Kong have ‘Expedited Procedures’, which state that the arbitration has to be completed within 6 months. The case can be decided by one arbitrator, without a hearing taking place. In certain cases, for example when there are limited financial stakes, this is a great solution.

Costs

Costs of arbitration tend to be higher than the costs of state court litigation, as fees and other costs of arbitrators are usually higher than the court fees. Parties also have to pay the service charges of the arbitration institute (which also functions as registry and case manager) and the potential costs for the rental of a hearing room. The various arbitration institutes define their own fees, with the KLRCA having a very competitive position in Asia.

Arbitration clause

Arbitration is only possible if parties have agreed to an arbitration clause in their contract. Make sure that the arbitration clause mentions the scope for arbitration (such as: “All disputes arising out of or in connection with this contract will be subject to arbitration”), the applicable law to the contract and to the arbitration, the seat of the arbitration and the appointed arbitration institute, the amount of arbitrators (one or three) and the language of the arbitration. If all this is mentioned in the contract, then, in case of trouble or not-so-smoothly-going-business, at least the arbitration proceedings are good to go!

The Kuala Lumpur Regional Center for Arbitration, located in the historical Bangunan Sulaiman building in the old town of Kuala LumpurThe Kuala Lumpur Regional Center for Arbitration, located in the historical Bangunan Sulaiman building in the old town of Kuala Lumpur