What is international arbitration, and why should California lawyers and business executives pay attention? In short, for cross border transactions, international arbitration has become the favored form of dispute resolution, particularly for larger commercial transactions. It is akin to a private court with its own peculiar language and customs.
The main reasons US companies insert international arbitration provisions into their contracts are (1) guaranteed enforceability of the final judgment ("award" in arbitration) under the international treaty known as the New York Convention; (2) a neutral venue for parties from different countries, as opposed to racing to court to fight their dispute in the courts of their respective countries; and (3) the parties' ability to select arbitrators with the appropriate skill set and availability, as opposed to having the courts randomly assign a judge who may or may not be appropriate.
When I was first tasked in 1996 by my former law firm, Morrison & Foerster, to start the firm's international litigation and arbitration practice, our firm was known as a trial powerhouse with considerable experience representing foreign clients in US courts and US clients in foreign courts (with local counsel). However, we were new to the world of international arbitration, as were other US firms outside of New York. Luckily, Morrison & Foerster had loyal clients who tapped us to represent them in international disputes. Our team members learned quickly and, case by case, we developed expertise in international arbitration alongside our trial expertise.
In the early days, the law firms with the greatest international arbitration expertise were based in Europe and, to a lesser extent, in New York for international commercial matters and in Washington DC for international treaty investment matters. Amusingly, California was, and in some quarters still is, viewed by the Europeans as the wild, wild West with out-of-control juries and courts, and insufficient appreciation for international arbitration. Their thinking was why step foot in California when one could have a gentlemanly arbitration in a European city before European arbitrators under rules and customs they had mastered?
Nothing is forever. Geopolitical and global economic trends have a way of upending one's assumptions. Those who fail to adjust to the changing world will eventually lose out. Since 1996, California has grown dramatically, in its economy and population. If California were a sovereign nation, its gross domestic product would rank it as the fifth largest economy in 2021, behind the US, China, Japan, and Germany. According to Bloomberg, once the 2022 figures are tabulated, California will likely pass Germany to become the fourth largest economy. Whether we become the fourth largest economy this year or next, it is indisputable that California is an economic powerhouse. It is a leader in many industries, for example, computers and smart phones, chip design and manufacturing, the life sciences, social media, entertainment, venture capital and private equity, agriculture, and eventually, renewable energy.
During the period 1996 through 2013 when I lateraled to DLA Piper to become US head of its global international arbitration practice, and thereafter, I had the opportunity to meet with many corporate legal officers to discuss international commercial disputes. As companies increased their international activity, they had increasing questions about dispute resolution. Many officers, particularly in the technology sector, were skeptical of arbitration. I understood their skepticism, which sometimes was borne out of bad results suffered by them or their peers and other times was simply lack of familiarity with commercial arbitration.
Arbitration is essentially a one-shot "roll of the dice," because there is no right of automatic appeal for errors of law. That is the bargain you make when signing up for arbitration: you get a faster and cheaper alternative to court litigation, but the flip side of the bargain is that arbitration will not be delayed by time consuming and expensive appeals. For a technology litigant, the risk that the arbitrator may "get it wrong" without meaningful oversight from an appellate court and the risk that the company could thereby lose rights associated with its technology "crown jewels," made arbitration a scary process. I should add a qualification: the losing party can obtain judicial review of an adverse arbitral award, but only through an application to vacate the award. To prevail, the losing party must show fraud or that the arbitrator exceeded his jurisdiction; errors of law generally are not sufficient to overturn the award.
Many times I told corporate counsel that I am agnostic about the choice between domestic litigation and domestic arbitration, particularly if the company has access to a strong judiciary such as the federal courts in California. But going overseas presents a different set of considerations. In fact, a US court judgment is not enforceable in many foreign courts because unlike in arbitration, there is no multilateral treaty where countries pledge to recognize the court judgments rendered in other signatory nations.
In one meeting, a senior corporate counsel asked if her company was making a mistake imposing US federal or state courts in Northern California as the sole mode of dispute resolution in their supplier contracts. I asked where the suppliers were located. Her answer was China, Vietnam, Malaysia, and less developed nations in Europe. Her company is a high profile technology company whose suppliers scramble to please. Suppliers sign their standard contracts just for the opportunity to work with them. The problem was that unless a supplier had sufficient assets in the US to pay off a judgment, the US court judgment was not enforceable in the suppliers' home courts. The perceived advantage gained from forcing the foreign supplier to agree to the US courts was illusory. Consequently, the client changed their supplier contracts to require international arbitration.
Even where the adverse party hails from a country whose courts would recognize a US court judgment, the parties might still be attracted to arbitration for its speed, confidentiality and neutrality. In the end, the client must understand the advantages and disadvantages of both forms of dispute resolution, litigation versus arbitration, and then thoughtfully draft their contract.
Let's fast forward to today. Within the U.S., New York maintains its position as the venue selected more often than other U.S. cities for international commercial disputes. But as the percentage of total global commerce shifts toward Asia and Latin America and away from Europe, New York's hold will necessarily slip. Other venues, including San Francisco, Los Angeles, and Silicon Valley, having many corporate headquarters, vibrant arbitration bars, and a strong judiciary to support arbitration, are actively seeking to become centers of arbitration activity. My prediction is that this geographical diversification will grow over the coming decades and will benefit the institution of arbitration.
California is the gateway to Asia. The number of trans-Pacific business transactions has grown exponentially over the past 25 years and will continue growing. Four of the top five venues ranked by GDP lie on the Pacific Rim. Many top corporate executives from Asian companies send their children to the US for college and consider California a second home. For a transaction entered into between a West Coast headquartered company and an Asia-based company, the logical arbitration venues are either in Singapore or Hong Kong, or in California. The question whether to select Asia or California as the venue depends on the relative negotiating power of the parties, on the strength of the parties' preferences for venue, and on what other contract terms are in play during the negotiations.
As a measure of the growth of international arbitration in California this is the second year the California Lawyers Association is hosting California International Arbitration Week (CIAW) -- the week of March 13 - 17, 2023. Many arbitral institutions are participating, including co-host California Arbitration, Inc. (CalArb), an organization formed by leading practitioners to promote international arbitration in California.
A CIAW panel I am participating in, "Opportunities and New Trends in the US to Asia-Pacific Practice," will cover a number of cutting-edge topics. Our panelists are highly experienced arbitrators, advocates, and arbitral institution representatives who will share their thoughts relating to the Asia Pacific practice. For example, what are the implications for commercial disputes and international arbitrations that flow from the rising tensions between the US and China? Where do Japanese, Korean, Chinese, Indian, and Southeast Asia companies feel most comfortable in resolving their commercial disputes and how can an arbitration center attract more of their arbitration work? What clauses do these companies demand in their contracts? How will these Asian companies' expectations and business customs -- which may be different from those of their European and North American peers -- change the way arbitration is handled? What is the potential for the new Singapore Convention to transform international mediation in the same way that the New York Convention transformed international arbitration?
The full panel includes Cedric Chao, Chao ADR, PC; Mariel Dimsey, secretary general of the Hong Kong International Arbitration Centre; Sally Harpole, independent arbitrator; Saeyoun Kim, partner, Kim & Chang; Gloria Lim, CEO, Singapore International Arbitration Centre; Hiroyuki Tezuka, partner, Nishimura & Asahi; and Luan Tran, partner, King & Spalding.
Our Asia Pacific program takes place Wednesday afternoon, March 15, beginning at 3:10 pm.
To view the entire week long CIAW agenda and to register, with no cost, search for "California International Arbitration Week" in any search engine or go to: https://lnkd.in/gnvj3AC9#CIAW2023. You can attend either in person in Los Angeles, or virtually.
In addition, before the week of CIAW, the Daily Journal is holding a Webinar, California International Arbitration: Coming of Age, on March 8 at noon, to expand your knowledge of the area which should be known by all California practitioners. You can register for the Webinar by searching for www.dailyjournal.com or at https://us06web.zoom.us/webinar/register/WN_nFl_ZyDGR4CIlMeXThqOBw