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Emergency exit

|Written By Paul Brent
Emergency exit

For more than half a century, international arbitration has proven increasingly popular as a way to settle disputes between parties headquartered in different countries. The reasons for the attractiveness are many, but chief among them is the reluctance of parties to have a dispute heard in a foreign court. Other perceived benefits include the promise of confidentiality, a more enforceable decision at the end of the day, a faster, cheaper process — at least in theory — and the ability to lay out the ground rules for dispute resolution ahead of time.

“In international business, arbitration takes on a whole different level of importance,” says Mark Gelowitz, a litigation partner at Osler Hoskin & Harcourt LLP. “You have parties who maybe don’t speak the same language, they don’t have the same legal system, and they don’t have any particular confidence in the legal system of their counterparty. In circumstances like that it begins to make a lot more sense to have a regime set up where both parties are going to have confidence in the decision-maker, they are going to have confidence in the independence of the result that is reached, and they are going to have confidence in the ability to enforce that result.”

While it sounds simple, crafting a well-designed arbitration clause necessitates a combination of skill, foresight, and perhaps aggressiveness on the part of the participants. “That has to be very carefully thought through and written into the contract. Once the dispute has arisen, it is too late,” says Gelowitz, who in 20 years has seen all variety of arbitration clauses. “They range from one sentence to 20 pages. I’m not exaggerating.”

He adds, “As litigators we are always kind of bemoaning this, but typically the arbitration clause is the last thing that the corporate lawyers sit down and think about once they have solved everything else in the deal. And they say ‘OK, well, we need an arbitration clause, and we need it in 20 minutes because we are signing the contract.’” Gelowitz also notes that two parties can create a binding arbitration clause with just one sentence, but it would lack some pretty crucial elements such as details of the process, protections for the various parties, and other customized elements specific to the parties. At the other end of the spectrum, a very detailed arbitration clause can spell out the escalation leading to arbitration, how the parties state their positions, and every step along the way in the process.

Other elements to consider include where the arbitration should be heard, under what rules (for example under those of an administered arbitration organization), how many arbitrators will hear the dispute — one or three — and the way in which they will be selected.

Barry Fisher, vice president, general counsel, and corporate secretary for software maker SAP Canada Inc., says companies can run into trouble with international arbitration when they bolt on boilerplate clauses to a business contract. That practice can leave out what he views as key considerations: the location of the arbitration hearing, the language it will be conducted in, the time frame of the hearing, as well as discovery and document protection. “To some extent it depends on whether you think you are going to be seeking a remedy or defending against someone seeking a remedy, it may [govern] how particular you are about this,” says Fisher, who previously worked as general counsel to an inter-listed mining company and has served as an arbitrator on a number of disputes with international parties.

While the practice of international arbitration has a solid history and foundation, Fisher’s answer to the question of whether companies are getting more proficient in the creation of robust arbitration clauses is simple: “Yes and no. Some do a good job. The ones who put their minds to it are doing better. Sometimes I am still seeing arbitration clauses that are ineffective.”

The default tendency of counsel that are concerned about any and all eventualities might be to figuratively put everything but the corporate kitchen sink in an agreement with a foreign partner. While admirable, that approach can lead to unexpected consequences. “You may not want everything put in an arbitration clause,” says Fisher. “In our licence agreements, I have arbitration clauses in my contracts, but I carve out intellectual property. I do not want — even though I may have a trained arbitrator knowledgeable about the subject matter — I do not want an individual to make a determination about intellectual property rights without a right of appeal.”

One of the touted advantages of arbitration is its finality, but for a core component of a company, in SAP Canada’s case its intellectual property, the “all-in” risk is simply too great in Fisher’s view. “In some matters, I cannot simply bet the company and take the risk on finality if that individual in my view gets it wrong.” Fisher is much more comfortable with the prospect of taking an intellectual property-related dispute to the Federal Court where judges regularly deal with IP issues, and there is an established path for appeal. It is up to corporate counsel to determine what the “crown jewels” are in their respective companies when crafting arbitration language, Fisher says.

Even as international arbitration continues to gain favour with companies generally, some counsel still look on their courts with favour, notes Fisher. “I differ with some of my international colleagues within my organization. Some prefer the security and procedures of courts.”

Relying on the courts to settle operational disputes between two parties can be unpredictable and uncertain and the chance for an arbitrary or biased decision has provided the main impetus for the growth in arbitration. Resolving corporate disputes through the courts can provide a winning result that oftentimes proves to be unenforceable in the other party’s home country. That is not merely an occurrence in developing countries but in jurisdictions such as Europe.

Considering the creation of international arbitration more like insurance and less like litigation might be a better way to approach the subject. “When I talk to corporate counsel, I will often talk about international arbitration as being part of risk management because that tends to get corporate counsel’s attention as something important,” says Barry Leon, a partner in the international arbitration group of Ottawa’s Perley-Robertson Hill & McDougall LLP who also regularly acts as an arbitrator. “Part of it is, ‘If things go badly, how do we get out and get our money out,’ and international arbitration is something to think about,” he says.

While the creation of an arbitration clause is understandably just about the last thing to consider when two parties are dealing with the complexities of a transnational business partnership, it can be an opportunity to insert a clause more favourable to your corporation’s side, notes Leon. “Take a little bit of time on the front end on your own side and think about ‘What is the kind of arbitration clause that will work in our favour?’ Not so that it is totally one-sided, but for some reason you may be in a situation where it will be to your advantage to have a particular kind of arbitration, a certain set of rules or a certain place to have the arbitration heard. Often if you think about it ahead of time you can get that in the contract because the other side will not have thought about it.”

Keeping disputes out of the public eye is often viewed as a major benefit for companies that want to keep their business practices out of the media or have proprietary technologies or processes they want to keep out of reach of competitors. Arbitration may have another salutary effect — dialing down the tension between business partners. “I have found arbitration, in part because of its lack of a public nature, tends to allow parties to resolve the dispute and maintain the relationship,” says Fisher. “You can, at different times in an arbitration context, determine what is in your interest and resolve the matter, whereas in my experience litigation tends to create harsher feelings.”

Whether behind closed doors or potentially in the full glare of camera lenses, a dispute is still a dispute. That’s the assessment of Marie-Christine Dupont, Montreal-based legal counsel with mining company Rio Tinto, who says that she has found little difference between litigation and arbitration on the long-term relationship between two business partners. “Experiencing arbitration to me it is just the same as if we were in court litigation in terms of relationship of the parties. It is a dispute, and the outcome will be resolved by a third party.”

She notes Rio Tinto is currently going through the arbitration process with a long-term business partner and says that fighting it out in private will not ultimately salvage that relationship. “We’re still in a dispute with them and it broke the business relationship. It’s a big dispute, and I don’t see how you can be in a big dispute and keep doing business together. And whatever the outcome, one party will be unhappy, and it will take time before, I think, we can do business again.”

Dupont also says arbitration’s touted benefits of being cheaper and faster than court proceedings are not necessarily the case. “For instance with [the International Chamber of Commerce’s International Court of Arbitration], I find it very long,” she says. “Because it is long the procedure tends to be . . . more costly because it takes more time.”

Corporate counsel looking to arbitration as a way to ensure that corporate affairs are kept behind closed doors might also be disappointed with how the process often works in practice. “If people really are choosing international arbitration because they never want anything about their dispute to become public, they are probably somewhat misguided as well,” says Martin Valasek, a litigation partner with Ogilvy Renault LLP in Montreal. “Many companies that are entering into agreements are public companies and they do have disclosure requirements including disputes that are important to their bottom line. Secondly, when you are in an arbitration, it doesn’t mean that you will always avoid the court system. The court system can come into play, even if everything is going reasonably well, one party might decide they want to go to the local court in the place of arbitration to get some assistance for example to enforce an order related to the arbitration. In that way, you can get breaches of the privacy bubble.”

Finally, unless it is specifically spelled out in the arbitration language, privacy can be stripped away by one of the parties. “Contractually you can try to prevent it, but nothing prevents one side from running to the local court and trying to set aside the award. Right then and there, the thing becomes public.”

Privacy is one benefit of international arbitration and occasionally speed and financial savings, however Valasek says ultimately it is the implied promise of neutrality that is steering most companies to avoid litigation in favour of arbitration. “In my view, the most important feature and attractive feature of international arbitration is its neutrality,” he says. “Not only are you avoiding some far-flung place, but your counterparty is avoiding your court because they probably feel the same way about your court,” he says. Valasek adds that when the parties are coming together, there is clearly an interest in doing business together; one has something they want to sell or they want to do a joint venture. “That’s all fine and good, and they are in a honeymoon period. But when they start thinking about what will happen when things go wrong, it starts to get less interesting. That is really the most important factor driving the attractiveness and attention to international arbitration in those types of transactions.”