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Corporate Counsel Connect collection

May 2015 Edition

Outside your (U.S.) comfort zone: Why you need to understand international arbitration

Karen Deuschle, Corporate Counsel Connect Editorial

Cedric Chao Cedric Chao

With a single contract, your company just expanded its footprint into a new country. While the business might be looking at new strategic partnerships, expanded markets or increased revenue in this new jurisdiction, it is up to corporate counsel to protect the company's interests and avoid disputes. Accordingly, corporate counsel dealing in cross-border transactions must develop a good understanding of international arbitration and how it can benefit your organization. Corporate Counsel Connect had the chance to speak with DLA Piper's Cedric Chao, co-head of their international arbitration practice, regarding the choice to forego litigation and direct parties to international arbitration for dispute resolution.

To litigate or arbitrate – That is the question

Cedric is seeing more and more cross-border contracts that have mandatory international arbitration provisions as the mechanism to resolve disputes, and for good reason. Arbitration tends to lead to a more enforceable result when multiple countries are involved. Cedric explains the challenge of relying on the U.S. courts alone:

Imagine you have a contract, and you have superior bargaining power. It is natural to say to the company from another country, "You have to come here to the U.S. to litigate." You go through the U.S. courts, you win, and you now have a U.S. court judgment. Then what? If the foreign company has assets in the U.S., you can attach them, file a lien, and otherwise satisfy your judgment. But usually you're not so lucky. You then have to go through the courts of the other country. The problem is that a U.S. court judgment is not recognized in many countries. So it's worthless. You just spent considerable time and money, and you have nothing to show for it.

This example illustrates what Cedric finds to be the two most significant reasons to advise arbitration: "You want your final judgment to be enforceable in the home courts of the other company, and second, you want to litigate on an even playing field. You don't want to worry about the other side having a home-town advantage."

Arbitration, however, is far from the answer for every dispute. "There is no perfect system," Cedric explains. Exactly like arbitration within the U.S., with some exceptions, there typically is no appeal. "If you win, you love arbitration; if you lose, you hate it," jokes Cedric. The benefits may not be as big as the "arbitration supporters would lead you to believe," he adds.

Arbitration may be considered cheaper and faster, but sometimes that comes at its own cost. Speed and savings are realized as there is far less discovery in this process. "I think a number of U.S. general counsel are surprised at how hard it is to get discovery in traditional international arbitration," Cedric states. For anyone relying on discovery to prove their case, they might be disappointed with the process. Parties can provide for more discovery in their contracts or negotiate for discovery during the initial procedural hearing with the arbitrators, but adding discovery necessarily means more time and more money spent. In addition, you pay for your arbitrator, whereas in the U.S. you don't pay for your judge. "The best arbitrators are as expensive as the top partners in top law firms," he explains.

International arbitration is heavily influenced by legal systems outside of the U.S., creating its own nuances that require experience. Naturally in arbitration there is no jury, little discovery, and much less motion work. As it is influenced by the continental European and English court system, the cross-examination process is also much different from the United States court system. Cedric shares, "Lawyers in other countries talk differently. We American trial lawyers are very direct and very adversarial when cross-examining. In the international arbitration setting, we're viewed as quite impolite. You have to learn the language of arbitration to succeed. You don't want to be seen as an American trial lawyer. You want to be seen as someone who knows 'how the game is played' and who has absorbed the 'culture' and adapted to the rules."

In search of an international arbitrator

In the event that your company finds itself in a cross-border dispute and headed into international arbitration, you will likely present your case to three arbitrators. Cedric advises his clients to have the arbitrator selection process written into the original contract. In choosing the panel of three arbitrators, your company selects the first arbitrator, allowing you to select an arbitrator the company is familiar with or who has a specific skill set, such as industry expertise or cultural knowledge. The second arbitrator is chosen by the other party, and the final arbitrator is agreed upon by the first two arbitrators. Arbitrators could be picked from any countries within the contract limits. Alternatively, where potential disputes are limited in their complexity or likely damages, the parties may decide to contract for a sole arbitrator to reduce costs.

In any case, finding your arbitrator may prove more difficult than expected because companies cannot rely on the tools and resources they use here in the U.S. to select outside counsel and to learn about judges. There is no Super Lawyers – Arbitrators Edition and no predictive analytics on these international experts. Most arbitrations are confidential and not posted anywhere. "It's word of mouth," confides Cedric. Being in a large law firm with a global footprint has advantages in this context; Cedric is able to check with coworkers about what they think of a particular candidate. Sometimes clues can be found on the individual arbitrator if they leave a paper trail, such as an article or lecture. The best people to lead you into international arbitration are those who are "in the club;" those who know how to identify the right arbitrator and are privy to important details about them, like personality, style and legal philosophy. A global network of contacts in this area is key to finding the best arbitrator for your needs.

Trends in international arbitration

As more and more companies expand internationally, international arbitration must as well. Cedric sees several trends that support that. With so many U.S. companies now involved in cross-border contracts, an increasing percentage of U.S. lawyers are encouraging their clients to participate in international arbitration. Cedric cites the International Arbitration Survey 2013: Corporate Choices in International Arbitration, from PricewaterhouseCoopers and Queen Mary University of London, which shows there are several industries that have embraced arbitration more than others, namely construction and energy.

Cedric observes that there has been the gradual development of a hybrid system of dispute resolution. As this area is being developed all over the world by lawyers trained in different systems, there has been a blending of civil law and common law practices. As a result, those practicing international arbitration are, in effect, creating their own unique procedures. No regulation, foreign or otherwise, is forcing the development of these procedures. Rather, they are being created organically based on the experiences of those involved, taking the best ideas from the legal systems of different countries to create a system acceptable to all.

Finally, from his position in tech-heavy Northern California, Cedric finds that many young tech companies are wrestling with the concept of international arbitration. These start-up companies and venture capitalists are "very worried that their intellectual property, the value of their company, will be subject to arbitration, where there typically is no appeal. What if it goes wrong? What can they do?" Furthermore, Cedric explains, "Many of the arbitrators are from a different generation and spent their formative professional years working with insurance contracts and day-to-day commercial contracts," often with little involvement with patents or new technologies, which makes many young tech companies hesitant to use arbitration. At the same time, however, those tech companies also want to have an enforceable judgment. Therefore, a major trend is that tech companies, despite their concerns, are finally starting to look at arbitration as a possible solution during cross-border disputes, to ensure the award will be enforced.

Are you ready for a global dispute?

Cedric admits that his background in both litigation and arbitration make him an unusual lawyer, such that he is comfortable representing clients in either system. Still, his pedigree alone (a member of the ICC Arbitration Commission, Director of the American Arbitration Association, and Advisor to the American Law Institute project to draft the Restatement of U.S. Law of International Commercial Arbitration) shows he has a wealth of experience in international arbitration and will undoubtedly go to bat for his clients whether in arbitration or litigation. For companies wrestling with the dispute resolution options in the international context, Cedric recommends these top three considerations when looking at arbitration: enforceability of the award, a neutral forum, and the opportunity to pick your arbitrator, in particular one with the relevant expertise and experience.

As international business grows bigger and each individual country's laws become more complicated and regulation-driven, it is highly likely that international arbitration will become part of your responsibilities. As your company expands, are you ready?

About Cedric

Cedric Chao is a trial partner and co-head of the international arbitration practice of DLA Piper LLP, a 4,200 lawyer global law firm, resident in San Francisco. Cedric is equally comfortable in U.S. courtrooms and before international arbitration tribunals. He is listed in Best Lawyers in America (for arbitration and business litigation), Global Arbitration Review's International Who's Who of Commercial Arbitration, Euromoney's Guide to the World's Leading Litigation Lawyers, and Euromoney's Guide to the World's Leading Experts in Commercial Arbitration. Chambers USA and Chambers Global describe Cedric as a "rigorous, creative, problem-solving thinker," and note that "market commentators praise [him] for his broad capabilities as a passionate advocate." He is a U.S. member of the ICC Arbitration Commission, and a director of the American Arbitration Association. Cedric is a graduate of Stanford University and Harvard Law School.

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