Tag: international arbitrations

Diving Into SECURE 2.0: Changes for Small Employer Retirement Plans

International arbitration provides a binding, neutral, and consensual process for resolving contractual disputes between parties, often resulting in resolutions that are quicker, cheaper, more private, and more controllable than litigation in a court of law. Accordingly, arbitration for the resolution of international disputes between contracting parties from different legal jurisdictions has emerged as a fundamental method for resolving complex disputes in an ever-increasingly interconnected world. Multinational companies should make sure they stay up to date on the fundamentals of international arbitration, and it all starts with ensuring any arbitration clause included in an international agreement is drafted in a way that is enforceable and provides contracting parties a clear path toward the resolution of their dispute.

Why Should You Care about What Your Arbitration Clause Says?

An arbitration clause is the starting point for determining the parties’ intent in resolving their dispute outside a court of law. It is an independent agreement within the broader contract, likely enforceable even if the remainder of the contract is procured by fraud, and sits at the apex of what a court or arbitrator will look for to determine the parties’ intent with respect to how a dispute between contracting parties should be resolved.

A clear arbitration clause results in a meaningful, enforceable outcome, minimizes the intervention of U.S. or foreign judiciaries in what should be a private dispute resolution process, grants the third-party administrator and/or the arbitrator the powers necessary to resolve the dispute, and is conducted in accordance with procedures that help guarantee a fair, efficient proceeding.

In contrast, if an arbitration clause is ambiguous, there may be a finding that there is no dispute resolution agreement to enforce. This can result in challenges to the arbitration clause’s enforceability and potential litigation in unfavorable and less-than-ideal judicial systems. Of course, such ambiguity and challenges will create higher costs, longer windows of time to resolve disputes, greater risks that your claims in the dispute will be vulnerable to collateral attacks, and other unintended and unexpected consequences.

What Are the Hallmarks of a Clear Arbitration Clause?

For purposes of clarity, you should ensure your contract’s arbitration clause identifies:

  • Applicable Law. Which country’s (or state’s) law applies?
  • Forum and Rules. There are any number of arbitral forums, each with its own nuances in terms of procedure. Knowing the business and potential disputes that could arise will assist in selecting a good fit in terms of applicable rules.
  • Seat of Arbitration. The seat of the arbitration is more than just the place where the final hearing will take place. It provides a significant backbone to the proceeding and is as important as the selection of the forum and applicable rules.
  • Number of Arbitrators. The more arbitrators, the larger the cost, but a three-member tribunal has its place in certain disputes.
  • Language. Selecting the language (or languages) of the arbitration can greatly affect the cost of the proceeding.

Why Does Selecting the Seat of Arbitration Matter?

More than just the physical place where the arbitration will take place, the seat of arbitration is a legal construct that determines the lex arbitri — the procedural law of the arbitration.

Where the contract between the parties or the rules selected by the parties do not provide for certain procedures, the procedural laws of the seat of arbitration will be applied. Among the important aspects of a proceeding that the seat of the arbitration determines is:

  • Which courts will have supervisory jurisdiction over the arbitration;
  • Definitions and form of an agreement to arbitrate;
  • The arbitrability of the dispute;
  • The constitution of the arbitral tribunal and any grounds for challenge;
  • The equality of treatment of the parties;
  • The freedom to agree on detailed rules of procedure;
  • Interim measures of protection and court assistance;
  • Default proceedings;
  • The validity of the arbitration award; and
  • The finality of the arbitration award, including which courts will hear challenges to the award.

If not clearly identified by the parties, the seat of arbitration — and the procedural laws of that seat — will be selected by the arbitral tribunal.

What Do the Rules You Picked Say About Interim Measures?

A major consideration in selecting the applicable arbitral rules is the availability of interim measures. These are measures of relief, which can include injunctive relief, obtained prior to the commencement of, or during, an arbitral proceeding.

One of the most interesting forms of interim measures is an award of security. An interim award of security in arbitration is a payment of an amount of monies (usually tied to damages) pre-hearing for the conservation of, and enforcement of, a judgment so as to not render a judgment in the future a Pyrrhic victory. These securities prevent the dissipation of assets before it is too late to reach those assets. As such, it is an extremely powerful tool, and determining whether the rules you select, and/or the seat of the arbitration, allows for such an interim award should be a key consideration in drafting your arbitration clause.

What Are the Abilities and Liabilities of Third Parties?

Depending on the circumstances, jurisdiction chosen, governing law, and seat of the arbitration, a third party (a non-signatory to the agreement) can compel arbitration and be compelled to arbitration, the latter being the rarer occurrence. Knowing if there is potential exposure to such parties, which can include directors, officers, employees, beneficiaries, and others, should be assessed prior to entering into an arbitration agreement.

On What Basis Are Arbitral Awards Enforceable?

Arbitral awards, because of the adherence by more than 160 countries to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”), are the most enforceable award anywhere in the world. Under the New York Convention:

  • A written agreement to arbitrate, including as contained in a contractual arbitration clause, is generally enforceable.
  • Subject to very narrow exceptions, an arbitral award may be recognized and enforced as a final judgment in each contracting country.

In contrast, no treaty requires that the judgments of a country’s court system be recognized; these enforcement decisions are made on an ad hoc basis according to principles of comity and public policy. The Hague Judgments Convention on the Recognition and Enforcement of Foreign Judgments, a treaty similar to the New York Convention, may become the relevant applicable framework in the future but is still in its infancy.

How Can Legal Counsel Help My Multinational Company Address International Arbitration Issues?

The best way to ensure a reliable and enforceable arbitration agreement is a careful examination of the structure and purpose of the contract as well as the company’s unique business profile based on how and where it does business.

Adequate legal counsel should provide clients with practical guidance in drafting and enforcing international arbitration agreements. Services provided should include:

  • Counseling: Counseling companies to understand how international arbitration clauses apply to their multinational operations, how they may benefit from such clauses, and/or how such clauses may not be in their best interest.
  • Drafting: Working with clients to ensure enforceable and clearly understood arbitration clauses are prepared for the specific contractual relationship, considering the myriad factors that go into preparing such a clause.
  • Risk Assessments: Working with companies to conduct risk assessments in the event of contract disputes with arbitration clauses.
  • Arbitration: Arbitrating before tribunals to secure interim securities and/or enforceable arbitral awards in the event of a contract dispute anywhere in the world.

© 2023 Foley & Lardner LLP

For more Litigation News, click here to visit the National Law Review.

SCOTUS Significantly Narrows Scope of 28 U.S.C. § 1782 for International Arbitrations

The United States Supreme Court’s recent decision in ZF Automotive US, Inc., et al., v. Luxshare, Ltd., No. 21-401, holds that U.S. federal courts cannot order discovery in aid of international commercial arbitrations or investor-state arbitrations.  In a unanimous decision, the Court reasoned that a “foreign tribunal,” under 28 U.S.C. § 1782, “is best understood as an adjudicative body that exercises governmental authority” rather than a private body that is merely located in another country.  Because the private arbitral tribunal in the ZF Automotive case did not exercise governmental authority, the Supreme Court denied discovery in aid of the proceeding under Section 1782.

The decision resolves a circuit split over whether private commercial arbitration panels should be considered “foreign or international tribunals” under 28 U.S.C. § 1782, and thus whether U.S. discovery should be allowed in such private commercial arbitrations.  Section 1782 authorizes a district court to order the production of evidence “for use in a proceeding in a foreign or international tribunal.”  The Fourth and Sixth Circuits have previously held that international commercial arbitrations are foreign tribunals under the statute, while the Second, Fifth, and Seventh Circuits have held that they are not.  The availability of discovery under Section 1782 is a key issue for the international arbitration community because the scope of discovery allowed under Section 1782 is generally broader than any discovery allowed under institutional arbitral rules or under foreign arbitration laws.

In reaching its decision, the Court found that the word “tribunal” carries a distinctively governmental flavor.  A prior version of Section 1782 covered only “judicial proceeding[s]” in any court in a foreign country, however, Congress later expanded the legislation’s scope to cover proceedings in a “foreign or international tribunal.”  The Court found that while this change broadens the understanding of “tribunal” to include tribunals that are not formal courts, the term is still best understood to refer to an adjudicative body that exercises governmental authority.  Under the decision, a “foreign tribunal” is a tribunal belonging to a foreign nation while an “international tribunal” is best understood as one that involves two or more nations imbued with governmental authority.  Location of the tribunal or the nature of the parties to the dispute are not determinative in this interpretation.

The Court also noted that extending Section 1782 discovery to cover international arbitrations would conflict with the Federal Arbitration Act, which governs domestic arbitrations.  Thus, interpreting Section 1782 as applying to international arbitration would create a “notable mismatch between foreign and domestic arbitration.”

The Court’s decision came in a consolidated case arising out of appeals in the Sixth and Second Circuits.  The first case involves a dispute between Luxshare, a Hong Kong company and ZF Automotive US Inc., a Michigan-based company, over an allegedly fraudulent sales transaction.  The agreement between the parties provided that all disputes would be resolved by an arbitral panel under the Arbitration Rules of the German Arbitration Institute (DIS).  In preparation for bringing an arbitration, Luxshare filed an ex parte petition under Section 1782 in the U.S. District Court for the Eastern District of Michigan seeking information from ZF Automotive and its officers.  The district court granted the petition and ZF Automotive moved to quash, arguing that a panel formed under the auspices of the DIS was not a “foreign or international tribunal” under Section 1782.  The district court denied the motion and the Sixth Circuit denied a stay.

The second case involves AB bankas SNORAS, a Lithuanian bank which was nationalized by Lithuanian authorities.  The Fund for Protection of Investors’ Rights in Foreign States, a Russian corporation, commenced an ad hoc arbitration proceeding against Lithuania under a bilateral investment treaty that the country entered with Russia.  The Fund filed a petition under Section 1782 in the district court seeking information from AlixPartners, LLP, a New York-based consulting firm, and one of its officers.  AlixPartners challenged the petition, arguing that the ad hoc panel was also not a “foreign or international tribunal” under Section 1782.  The district court rejected that argument in a decision that was affirmed by the Second Circuit.

The Court’s decision is likely to spark much discussion in the international arbitration community.  There will likely be a significant impact on current and future international arbitrations, with parties having to consider their strategies for discovery in light of the unavailability of a critical information-gathering tool.  On the other hand, for better and for worse, this decision will further streamline the international arbitration process, as many arbitral proceedings will not be delayed by related litigation over discovery in U.S. courts.

Article By Travis A. Gonyou of Binder & Schwartz

For more arbitration legal news, click here to visit the National Law Review.

© 2022 Binder & Schwartz LLP. All Rights Reserved