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International arbitration: Corporate attitudes and practices2006

International Arbitration • i

The growth in international trade and the flowof capital to fund investment in new marketscreate opportunities for corporations, but riskstoo. A key way for corporations to manage riskand safeguard value is to apply effectivedispute resolution policies when things gowrong. The resolution of cross border disputesis becoming more sophisticated. Increasingly,parties are choosing to resolve disputes awayfrom the courts through the use of internationalarbitration. It can provide distinct advantagesover litigation through its more flexibleprocesses and the wide enforceability ofawards; yet there are disadvantages,particularly for the unwary.

PricewaterhouseCoopers is increasingly beinginstructed to provide expert evidence toquantify loss and damage or to give opinionson valuation, economic or accounting issuesarising in international arbitration cases aroundthe world.

Anecdotally, the level of knowledge andskilled use of international arbitration appearsto be, at best, limited among investors in anddirectors of many international corporations.PricewaterhouseCoopers wanted to gauge thelevel of knowledge about international arbitrationamong a wide sample of corporations around

the world and to test certain myths andperceptions about international arbitrationagainst leading in-house counsel.

We are delighted to have sponsored thisresearch from the world-renowned School of International Arbitration, Queen Mary,University of London. They have brought theindependence and intellectual rigour ofacademic thinking and set their findings inthe context of existing academic researchinto the subject. The findings, to be publishedin academic journals, are summarised in thisstudy and will be of interest in boardrooms, lawfirms and universities around the world. Thisresearch should provide valuable insights forany business that trades or invests abroad. Wehope it will assist directors and their legal andother advisers to focus on international disputeresolution as a risk management priority therebypreserving, even enhancing, shareholder value.

Gerry LagerbergPartnerPricewaterhouseCoopers LLPLondon2006

It is widely suggested that internationalarbitration is on the rise and most contractsinclude arbitration clauses. However, there is hardly any tangible data. Against thisbackground, the School of InternationalArbitration, Queen Mary, University of Londonconducted this research into the attitudes andchoices of major international corporationstowards the resolution of internationalcommercial disputes. The specific objectives ofthe research were to set out current perceptionsof corporate attitudes towards internationalarbitration as a means of resolving cross borderdisputes and to obtain empirical data from awide sample of corporations, to either confirmor challenge these perceptions. All corporationsinvolved in this research are internationalplayers in their various sectors and most haveexperience in international arbitration.

This study is both ground-breaking andstandard-setting as it introduces empiricalmethods in the study of internationalarbitration: it is ground-breaking because it isby far the largest independent statistical studyyet on international arbitration and providesinsights into this so far esoteric area of law; it is standard-setting because an empirical baseline has now been set and more empiricalstudies will follow.

The study would not have been possiblewithout the insightful contributions made by the online respondents and theinterviewees and the generous cooperation of PricewaterhouseCoopers and the businesscommunity. We trust this cooperation will be ongoing and fruitful.

Professor Dr. Loukas Mistelis

Clive M Schmitthoff Professor of

Transnational Law and Arbitration;

Director, School of International

Arbitration, Centre for Commercial

Law Studies, Queen Mary,

University of London

2006

Introduction

International Arbitration • 1

Contents

Executive Summary 2

The Study 5Section Page no.

1 Use of international arbitration 5

2 Advantages and disadvantages 6

3 Dispute resolution policy considerations 8

4 International arbitration clauses 10

5 Ad hoc v. institutional arbitration 12

6 Venues for the seat and conduct of international arbitration 13

7 Potential for appeal on the merits 15

8 Appointment of arbitrators 16

9 Appointment of law firms 18

10 Cost 19

11 Sophistication of users 21

12 The future of international arbitration 22

Appendices 23Appendix Page no.

Methodology 24

Glossary 25

PricewaterhouseCoopers’ internationalarbitration network 26

2 • International Arbitration

International arbitration – a consensual,binding method of dispute resolution – offersthe means to resolve cross border disputesaway from litigation in national courts. This can create opportunities for the informedbut has pitfalls for the unwary. It is clear thatcorporations that equip themselves with theknowledge, tools and tactics to conductinternational arbitration proceedings are wellplaced to resolve their cross border disputeseffectively and thereby manage thisoperational risk.

This study into the views of in-house counselat leading corporations around the world teststwelve perceptions around internationalarbitration. The study was conducted during a six month period and comprised of twophases: an online questionnaire completed by103 respondents and 40 in-depth interviews.The study is presented in sections, each usingthe empirical evidence from the research toeither confirm or challenge these perceptions.

The key messages coming from this study are:

A significant majority of corporationsprefer international arbitration to resolvetheir cross border disputes

• 73% of respondents prefer to useinternational arbitration, either alone (29%)or in combination with Alternative DisputeResolution (ADR) mechanisms in a multi-tiered dispute resolution process (44%)

The advantages of international arbitrationclearly outweigh the disadvantages

• The top reasons for choosing internationalarbitration are flexibility of procedure, theenforceability of awards, the privacy affordedby the process and the ability of parties toselect the arbitrators

• Expense and the length of time to resolvedisputes are the two most commonly cited disadvantages of internationalarbitration. Other concerns include the risk of court intervention in the arbitrationprocess and the difficulty of joining thirdparties to proceedings

A clear dispute resolution policy providesan important strategic advantage whennegotiating dispute resolution clauses forcross border contracts

• 65% of online respondents said theymaintain a dispute resolution policy

• A policy can provide a framework for thedrafting of advantageous dispute resolutionclauses into contracts. This enables in-house counsel to deal more effectivelywith disputes once they arise, thus helpingcorporations anticipate and prepare for thenext phase of the resolution process

• 17% of respondents stated that a disputeresolution policy directly produces costsavings and a further 69% indicated that adispute resolution policy helps to minimisethe escalation of disputes

Well crafted international arbitration clausesgive corporations a tactical advantage in theevent that a dispute arises

• Arbitration clauses included in contractsdetermine the form and legal basis of thearbitration process and shape the way in which proceedings are conducted. Wellcrafted clauses can enable a party to

include beneficial terms (such as the choiceof seat and composition of the tribunal).However, it requires knowledge andexperience of the arbitration process toensure the choices made are advantageous

• 60% of in-house counsel interviewed saidtheir corporations have conceded pointswhile negotiating arbitration clauses; theclear inference is that those corporations,with hindsight, conceded important tacticaladvantages

Over three quarters of corporations opt forinstitutional arbitration

• The most commonly cited reasons for opting for arbitrations conducted under theauspices of an arbitration institution arereputation, familiarity with proceedings, an understanding of costs and fees and theconvenience of using an established process

• The top ranking institutions cited byrespondents were the InternationalChamber of Commerce (ICC), the LondonCourt of International Arbitration (LCIA) and the American Arbitration Association/International Centre for Dispute Resolution(AAA/ICDR)

Executive Summary


There is widespread support for regionalarbitration institutions

• A sizeable number of respondents weresupportive of the development of strongerregional arbitration institutions, which arecloser to the location of the disputes andwhich might also be less expensive thanestablished institutions

The tactical significance of the seat ofarbitration is not fully appreciated

• Legal considerations attaching to the “seat” of arbitration are the most importantreasons for a corporation’s choice of venuefor international arbitration proceedings

• The convenience of a location was asurprisingly close second, which suggeststhat some in-house counsel may not fullyappreciate the tactical significance ofchoosing the right “seat”

• The four most popular venues wereEngland, Switzerland, France and theUnited States

Corporations overwhelmingly favour thefinality of arbitration awards

• 91% of the online respondents reject theidea of including an appeals mechanism in international arbitration

Corporations are looking for arbitratorswith an established reputation in theinternational arbitration community

• There is a relatively small pool of experiencedarbitrators. Industry expertise and regionalexperience are increasingly desirableattributes of an international arbitrator

Corporations retain specialist arbitrationcounsel rather than their usual externallitigation counsel

• Corporations seek a firm that specialises ininternational arbitration, is experienced in thesubject matter of the dispute, has access tocounsel in the place of the dispute to provideregional expertise and is a specialist in theapplicable law. Availability and reputation ofcounsel are also important criteria

International arbitration is at least asexpensive as transnational litigation formedium and smaller size cases. In larger,more complex cases, internationalarbitration may represent better value for money

• In international arbitration proceedings, theparties must pay the costs of the arbitrationinstitution and the tribunal. These may appearsubstantial in actual terms. However, in mostcases their share of the overall expense ofproceedings is not regarded as excessive

There is demand for education on the toolsand tactics of international arbitration

• Despite 90% of in-house counsel feelingwell informed about international arbitrationproceedings, they indicated that theywished to receive more training. This, andother findings in the study, suggest thatcorporations might benefit from moreeducation about the process, opportunitiesand risks of using international arbitration

The outlook for international arbitration is extremely positive

• 95% of corporations expect to continueusing international arbitration and anincrease in cases is expected

• Corporations appear confident thatarbitration law and practices will generatethe solutions required to meet futurechallenges


The Study: Perceptions tested –myths, data and analysis


Use of international arbitration

1.1 Perception: Corporations prefer to use international arbitration ratherthan transnational litigation as a meansof resolving cross border disputes.

PARTIALLY TRUE

1.2 Data and analysis

Of the corporations that participated in theonline study and that had been involved incross border transactions, 81% had directexperience with international arbitration,transnational litigation, mediation, and/orother Alternative Dispute Resolution (ADR)mechanisms.

When asked what types of resolution processesthey have used for international disputes, overhalf reported using international arbitrationeither as a stand alone process (11%) or incombination with other mechanisms, such as ADR and litigation (43%). Only 4% hadexperience with transnational litigation alone.

When the same respondents were asked whichmechanism they preferred to use, 73% statedinternational arbitration; either alone (29%) or in combination with ADR mechanisms in amulti-tiered, or escalating, dispute resolutionprocess (44%). ADR mechanisms as astandalone approach were favoured by 16% of the corporations; transnational litigation waspreferred by only 11%.

So why do nine out of ten corporations seekto avoid transnational litigation? The mostcommon explanation is anxiety about litigatingunder a foreign law before a court far fromhome, with a lack of familiarity with local court

procedures and language. There are alsoconcerns about the lack of confidentialitysurrounding proceedings and the timeconsuming nature and associated costs ofpursuing litigation overseas. In addition, somecountries may lack an independent or impartialjudiciary and, in the worst cases, the systemmay be corrupt. Finally, even if these issuesare successfully navigated, the enforcement of a foreign judgment can prove very difficult.

Those corporations that are prepared to relyon transnational litigation tend to fall into oneof two categories:

• Corporations that operate principally indeveloped countries, where they believe thatthey will have access to an independent,impartial judicial system

• Corporations from developing countries thatmay be inexperienced with and apprehensiveabout the arbitration process and feel morecomfortable resolving disputes in their owncourt systems

1.3 Summary

• 73% of corporations prefer internationalarbitration as a means for resolving crossborder disputes

• In most cases, international arbitration is notused in isolation; its use in combination withADR mechanisms is the most common option

• Transnational litigation is the disputeresolution mechanism of choice for aminority of corporations (11%) in certaincircumstances

1

73% prefer to use international arbitration

International arbitration &transnational litigation

Transnational litigation

ADR

32%

%

16%

11%

9%

7%

4%

2%

19%

International arbitration & ADR

International arbitration

Transnational litigation & ADR

None

International arbitration &transnational litigation & ADR

0 10 20 30 40

Experience of dispute resolution mechanisms

44%16%

11%

29%

International arbitration & ADR

International arbitration

International mediation & other ADR

Transnational litigation

Preferred mechanism(s) for resolving crossborder disputes


Advantages and disadvantagesassociated with the use ofinternational arbitration

2.1 International arbitration is favoured inresolving cross border disputes because itoffers distinct advantages which outweighthe disadvantages.

TRUE


Advantages: We asked participants in theonline study to list the three most importantreasons for using international arbitration.

Flexibility of procedure was the most widelyrecognised advantage. The active participationof the parties in determining and shaping theprocedure inspires confidence in the process.

However, enforceability of awards was rankedas the single most important advantage by thehighest number of respondents (24 respondents).

Privacy, perhaps unsurprisingly, was alsoranked highly. International arbitration isconsidered by many as an effective way tokeep business practices, trade secrets,industrial processes, intellectual property, aswell as proceedings with a possible negativeimpact to the brand, private.This does notmean that everything in arbitration isautomatically secret or confidential; it merelymeans that proceedings are private and maybe confidential.

The ability of parties to select arbitrators withthe necessary skills and expertise and whoare well suited to the appropriate cultural orlegal context was also ranked highly.

A small number of respondents identifiedother advantages, such as: cost; speed; thepossibility of avoiding specific legal systemsand national courts; and the neutrality of thearbitral venue.

Disadvantages: Corporations are not entirelysatisfied with the process of internationalarbitration. We asked participants in theonline study to list their three most significantconcerns associated with the use ofinternational arbitration.

The expense of the international arbitrationprocess (including the costs of arbitrationlawyers, arbitrators, and the arbitrationinstitution that may be involved) was the mostwidely recognised disadvantage. 70 out of 80respondents cited it as one of their top threeconcerns, with 50% of respondents ranking itas their primary concern. This challenges oneof the common myths surrounding internationalarbitration, that it is less expensive than

2

0 10 20 30 40 50 60 70

First choice

Second choice

Third choice

Selection of arbitrators

Privacy

Enforceability

Flexibility 16

15

20

18

35

9

17

13

11

24

17

16

Number of respondents

Ad

vant

age

Most important advantages of internationalarbitration (No. of respondents)


transnational litigation. The cost of internationalarbitration is covered in more detail inPerception 10 (page 19).

A related concern is the time the arbitrationprocess takes from filing to award, which was the second most commonly expressedconcern. Both the International Chamber of

Commerce (ICC) and the American ArbitrationAssociation/International Centre for DisputeResolution (AAA/ICDR) claim that, in themajority of the cases, an award is renderedwithin 18 months from filing a request for arbitration, which is quicker than mosttransnational litigation cases. However, withproceedings increasingly simulating courtproceedings in the length of time it takes to complete an arbitration case, this is nowperceived as a disadvantage.

National court intervention was identified as a concern. Many countries have lawswhich allow international arbitrations to beconducted with limited, if any, intervention by a national court in the proceedings (for example, to challenge a decision by the arbitrators). However, this varies countryby country. While many modern arbitrationstatutes specifically limit court intervention, if the jurisdiction allows courts to intervene,there is little an arbitration tribunal can do.This makes the choice of the seat of thearbitration an important issue. In addition,court intervention will usually result inincreased time and costs.

30 respondents to our online study perceivedthe lack of an appeal structure as a potentialdisadvantage of arbitration. This may suggesteither that parties would prefer an appealsystem within the arbitration framework ratherthan choosing to appeal through the courts;or that parties are increasingly prepared tochallenge awards. However, a further findingof our study was that only a small minority, in practice, want an appeal mechanism. This is covered in Perception 7 (page 15).

The lack of a third party mechanism wasanother widely recognised concern. Partiesenter into international arbitration proceedingsby agreement. It can be very difficult to bringother entities, who are not party to thearbitration agreement, into the proceedings at a later stage.

2.3 Summary

• Corporations perceive that the distinctadvantages outweigh the disadvantagesassociated with the use of internationalarbitration

• The top reasons for choosing internationalarbitration to resolve disputes are: theflexibility of procedure, the enforceability ofawards, the privacy the process provides andthe parties’ ability to select the arbitrators

• Expense and time are not perceived asadvantages; indeed they were the two most commonly cited disadvantages of the process. However, the majority of in-house counsel interviewed stated thatthe success of the New York Conventionon the Recognition and Enforcement ofArbitral Awards compensates for failures in cost and time

• Other concerns associated with internationalarbitration include national court interventionin the process and the difficulty of joiningthird parties to proceedings

Flexibility of the procedure and the enforceability ofawards are the most widely recognised advantagesof international arbitration

0 10 20 30 40 50 60 70

First choice

Second choice

Third choice

No third party mechanism

National courtintervention

Lack of appealstructure

Time

Expense 14 16 40

6 18 14

15 15 4

9 14 7

11 5 9


Dis

adva

ntag

es

Disadvantages of international arbitration (No. of respondents)

3


Dispute resolution policyconsiderations

3.1 Corporations involved in internationaltransactions usually have a disputeresolution policy in place in order to beprepared for any disputes that may arise.

PARTIALLY TRUE


Our online study asked corporations whetherthey maintain a dispute resolution policy. 65%said they do, with over half having a policy in a crystallised form (such as standard terms ormodel clauses). The remainder have a policy in a non-crystallised form and explained thattheir policy serves as a guideline which couldbe modified by negotiation. A third of therespondents do not have a dispute resolutionpolicy in any form.

The most important benefit of having adispute resolution policy, according to 69%of respondents, is that it minimises disputeescalation, while 17% believe the primarybenefit is cost savings. The remaining 14%ranked the consistent internal practice thatresults from having a dispute resolutionpolicy as most important.

In our experience, a clear dispute resolutionpolicy provides an important strategic advantage.

A clear dispute resolution policy providesa strategic advantage

37%

28%

35%

Maintain a policy (crystallised format)

Maintain a policy (non-crystallised format)

Do not maintain a policy

Do corporations maintain dispute resolution policies?


It ensures that negotiators are informed andknow the parameters within which they can beflexible during dispute resolution negotiations.A policy can provide a framework for thedrafting of advantageous dispute resolutionclauses into contracts. This enables in-housecounsel to deal effectively and efficiently withdisputes once they arise, therefore helpingcorporations anticipate and prepare for thenext phase of the dispute resolution process.

Corporate dispute resolution policies:

• Assist with contract negotiations

• Assist with risk management and generallegal planning

• Facilitate dialogue between the legaldepartment and the rest of the corporationand increase awareness of legal support for corporate objectives

• Project a positive attitude towards disputeresolution

Our research shows that dispute resolutionpolicies often include clauses promotingmulti-tiered or escalating dispute resolutionprocedures. These may involve the partiesinitially holding negotiations with a view tosettlement, thereby avoiding the immediatethreat of legal proceedings. If this fails, thenext step prior to arbitration might include an attempt to settle with the assistance of a neutral third party.

3.3 Summary

• A clear dispute resolution policy providesstrategic benefits

• Corporations perceive an advantage indesigning a dispute resolution policy andusing it as a basis for negotiation

• 86% of respondents stated that a disputeresolution policy produces cost savingseither through effective management of thedispute process or by helping to minimisethe risk of dispute escalation

69%

17%

14%

Minimises dispute escalation

Saves costs

Promotes consistent internal practices

Most important benefit of maintaining a disputeresolution policy

4


International arbitration clauses

4.1 Perception: Corporations willalways try to include an internationalarbitration clause in their contracts. This is believed to provide an advantagein the event of a dispute.

PARTIALLY TRUE


In our interviews, 95% of in-house counsel said that their corporation includes some form of dispute resolution clause in their crossborder contracts. This clause might prescribeinternational arbitration, litigation, ADRmechanisms or a combination of these, evenif it is not required by corporate policy.

Our online study asked corporations whetherthey insist on the inclusion of an internationalarbitration clause in their cross bordercontracts as a matter of practice. 62% statedthat they insist on including international

arbitration clauses, 34% said they do notinsist and 4% were unsure.

However, an important finding is that 60% ofin-house counsel said that their corporationswill concede points when negotiating theseclauses if faced with strong objections fromthe counterparty. It is only when a dispute

arises that it becomes clear that well craftedinternational arbitration clauses can provide a distinct advantage and safeguard theinterests of the corporation.

The lack of attention to the negotiation of a suitable international arbitration clause can leave a corporation adversely exposedshould a dispute arise. Conversely, byensuring the inclusion of a well-crafted clause,it maybe possible to include advantageousterms should the dispute end up in arbitrationproceedings (such as the choice of seat andthe selection of arbitrators).

During our interviews some in-house counselexpressed concern about being excludedfrom the decision making process at this keystage of contract negotiations. Corporationsmight wish to reflect whether this exposesthem to additional risk.

Our online study also asked whethercorporations adopt standard form arbitrationclauses or draft clauses for individualcontracts. 48% of respondents stated thatthey use standard arbitration clauses in all

Well crafted international arbitration clausescan provide a tactical advantage

62%

34%

4%

Insist on including an international arbitration clause

Do not insist on including an international arbitration clause

Unsure

Do corporations insist on the inclusion of aninternational arbitration clause in contracts?


their contracts, while 43% tailor clauses toeach individual contract. The remaining 9%were unsure of their corporate practice.

In our experience, it is important to includean international arbitration clause, althoughwhether it is better to adopt a standard clauseor a tailored one depends on the circumstancesof the transaction. Standard clauses, whetherrecommended by arbitration institutions or

drafted by the corporation, are invariably welltested but may not suit the circumstances ofthe contract under negotiation. Tailored clauses,on the other hand, may suit business needsmore precisely but arbitration experts should beinvolved in the drafting as there may be pitfallsand missed opportunities when clauses aredrafted by those who are unfamiliar with thearbitration arena.

Typical defects of a poorly drafted arbitrationclause may include:

• Merely providing the parties with an optionto choose arbitration

• Lack of clarity as to whether the partiesactually agreed on arbitration or on someother form of dispute resolution, such asexpert determination

• Conflicting dispute resolution provisions,e.g. an exclusive jurisdiction clause forlitigation and an arbitration clause

• Incorrect reference to the institution under whose rules an arbitration shouldtake place or designating a non-existentappointing authority

• Pre-arbitration stages in multi-tier disputeresolution clauses maybe poorly defined

• Issues relating to the seat, composition of the tribunal and other important factorsmay be omitted; this might be a defect ormerely a lost opportunity to influence thedispute resolution process

4.3 Summary

• Most corporations insist on the inclusion of an arbitration clause in their contracts

• Multi-tiered or escalating dispute resolutionclauses are increasingly popular

• Fractionally more corporations usestandard form arbitration clauses ratherthan tailored clauses in their contracts

• A majority of in-house counsel indicatedthat their corporations have been willing to concede points and/or arbitrationclauses during negotiations to complete a transaction, possibly conceding legal and tactical opportunities in the event adispute ends up in arbitration proceedings

48%

43%

9%

Standard clause

Tailored clause

Unsure

Do corporations use standard or tailoredinternational arbitration clauses?

5


Ad hoc v. institutional arbitration

5.1 Perception: Corporations preferinstitutional arbitration to ad hoc arbitration.

TRUE


Online respondents were asked whether theygenerally opt for arbitration under the rules of an arbitration institution or whether theymutually agree their own (ad hoc) process. A clear majority, 76%, reported that they optfor institutional arbitration.

We asked the respondents to our onlinestudy to select their top three reasons forchoosing institutional arbitration and weapplied a weighting system to the results. A strong reputation for managing arbitrationproceedings was the most widely recognisedreason for choosing institutional arbitration,

scoring more than the second and third mostcommon reasons (familiarity with proceedingsand an understanding of costs and fees) put together.

The 24% of respondents that stated theirorganisations prefer ad hoc arbitrationproceedings are primarily from corporationswith a gross annual turnover of more thanUS$5 billion. In many cases, thesecorporations have large, sophisticated

in-house legal departments with experienceof managing arbitration proceedings.

An important finding of the study was that a sizeable number of respondents weresupportive of the development of stronger“regional” arbitration institutions1. Manycorporations indicated an interest ininstitutions closer to the location of thedispute, which might also be less expensivethan established institutions. However, most

corporations are not yet willing to send theircases to less established regional centresbefore they have a proven track record.

To determine the most popular arbitrationinstitutions, online respondents were asked to choose their top three preferences from alist of ten well known institutions. Respondentshad the option to add other preferredinstitutions to the list. The institutions werethen ranked by applying a weighting system to the answers. The ICC, LCIA and AAA/ICDRwere ranked the highest.

5.3 Summary

• 76% of corporations opt for institutionalarbitration; the 24% opting for ad hocproceedings are primarily largercorporations with more experience ofinternational arbitration

• The most commonly cited reasons forchoosing institutional arbitration arereputation, familiarity with proceedings,

1 “Regional” arbitration institutions referred to were SIAC, JCAA, CANACO, ACICA and CRCICA. Definitions of these acronyms can be found in the glossary.

Other

Review of previous awards

Advice from external counsel

Convenience of the process

Understanding of costs & fees

Familiarity with proceedings

Reputation 37%

%

19%

15%

14%

8%

4%

3%

0 10 20 30 40

Reasons for choosing institutional arbitration42%

%

20%

15%

13%

4%

3%

2%

1%

0 10 20 30 40 50

CIETAC

HKIAC

Swiss

SCC

AAA

“Regional”

LCIA

ICC

Preferred arbitration institutions

6


understanding of costs and fees and theconvenience of the process

• The top-ranking institutions of choice arethe ICC, the LCIA and the AAA/ICDR

• There is demand from corporations for the development of stronger regionalinstitutions, however they must demonstratea proven track record to instil confidence inpotential users. This presents an opportunityand a challenge for some regional institutions

Venues for the seat and conductof international arbitration

6.1 Legal considerations are the mostimportant factor in the choice of a venuefor arbitration.

PARTIALLY TRUE

The seat of international arbitration determinesthe procedural law which, in concert withinstitutional or ad hoc rules, will govern theconduct of arbitration proceedings.

There are conflicting views on the importanceof the seat of arbitration. One view holds thatthe seat is important as it determines thesupport or intervention that may be receivedfrom local courts in the course of arbitration,(i.e. the extent to which awards may bechallenged where basic procedural standardsof fairness are not followed and the guidancethat may be provided by the local law when thechoice of arbitral procedure by the parties is

not sufficiently comprehensive). An alternativeview is that the choice of seat is less importantbecause it is often a matter of convenience orgoverned by the desire for neutrality.


The online questionnaire referred toarbitration venues rather than the legally-laden terms “seat” or “place” of arbitration.

We asked online respondents to rank theirtop three choices for an arbitration venue andthe three most important factors in determiningtheir choices. The four most popular venuesare shown in the graph overleaf.

Corporations support the developmentof strong regional arbitration centres


When asked for the main reasons for theirchoice of venue, online respondentshighlighted legal considerations, convenience,the neutrality of the venue and proximity toevidence and witnesses.

Legal considerations were chosen as thesingle most important factor by the highestnumber of respondents. Convenience came a close second. The fact that many in-house

counsel see the choice of seat as more amatter of convenience than of concern withlegal issues might suggest that some do notfully appreciate the significance of choosingthe right seat for international arbitration. It may not be clear to some in-house counselthat the choice of seat is a tactical decisionthat can help them achieve the best outcomefor their side. This suggests that in-houselegal departments might benefit from

briefings by arbitration specialists on the legalconsequences and tactical opportunitiesarising from the choice of seat.

6.3 Summary

• Legal considerations were the single mostimportant factor for a corporation’s choice of venue for international arbitrationproceedings

• However, convenience was a surprisinglyclose second. This suggests that thearbitration community may need to domore to educate in-house counsel in this area

0 10 20 30 40 50 60

First choice

Second choice

Third choice

United States

France

Switzerland

England 6

10

10

11

22

17

17

10

29

9

8

9


Venu

e

Preferred international arbitration venues

0 10 20 30 40 50 60 70

First choice

Second choice

Third choice

Proximity of evidence

Neutrality

Convenience

Legal considerations 11

20

15

18

16

17

19

15

29

25

17

6


Fact

ors

Factors in choosing a venue

Tactical significance of the seat of arbitrationis not fully appreciated

7


Potential for appeal on the merits

7.1 Perception: Corporations wouldlike the ability to appeal an arbitrationaward or to have a review of the meritsof an award.

FALSE


Traditionally, one of the main advantagesassociated with international arbitration hasbeen its finality. In recent years, however,there has been an increase in the number ofapplications challenging awards.

However, 91% of the online respondents and an overwhelming majority of thoseinterviewed reject the idea of including anappeal mechanism in international arbitration.According to those interviewed, theadvantages of the finality of an awardoutweigh the need for an appeal mechanism.

The ability to appeal is seen as adisadvantage because it makes arbitrationmore cumbersome and litigation-like andessentially negates a key attribute of thearbitral process.

The 9% of respondents who supported someform of appeal system as part of the arbitrationprocess cited previous, negative arbitrationexperiences as the reason for their views.

7.3. Summary

• Corporations overwhelmingly favour thefinality of arbitration awards, view this as a vital attribute and reject the idea of anappeal mechanism

9%

91%

Do not favour an appeal mechanism

Favour an appeal mechanism

Views on developing an appeal mechanism for awards

8


Appointment of arbitrators

8.1 Perception: Arbitrators areprincipally appointed on the basis of their reputation.

PARTIALLY TRUE


50% of online respondents stated that theyappoint arbitrators on the advice of externalcounsel; 33% appoint arbitrators on the basisof personal knowledge; and 3% appointarbitrators on the recommendation of a thirdparty. The remaining 14% leave the selectionof arbitrators to an appointing authority.

In the online study, in-house counselhighlighted the various factors they take into consideration in appointing arbitrators2.With their assessment of a candidate based

on personal knowledge, information frominformal contacts and recommendations of external counsel, 90% of respondentshighlighted the reputation of the arbitrator as the most important factor. This is closelyfollowed by expertise and common sense,attributes considered important by 80% of

respondents. Knowledge of applicable lawand of relevant languages are also desirableattributes of international arbitrators, mentionedby 70% and 60% of the respondents,respectively.

An important finding is that in-house counselgenerally favour appointing an arbitrator with

14%

33%

50%

3%

Advice of external counsel

Personal knowledge

Appointed by authority/institution

Advice of third party

How arbitrators are selected

Reputation 90%

80%

80%

70%

60%

Expertise

%

Commonsense

Knowledge of applicable law

Knowledge of relevant languages

0 25 50 75 100

Attributes of an arbitrator

2 It was presumed that arbitrators are neutral, independent, and impartial.


specialisation or expertise in the subject matterof the dispute. They also increasingly seek:

• Specialisation in industry sector

• Regional or country experience

• Cross-disciplinary expertise (e.g. technicalor financial background) which may beuseful for the quantification of damages, orunderstanding relevant market conditions

In-house counsel believe that arbitrators with these skills save their corporations timeand money.

Our research also reveals that in-house counselprefer to have an arbitration “heavyweight” on the panel (often as chairman) to conduct the process with knowledge, authority andgravitas. Ideally two specialists in law, industryor geographic region make up a versatile andinformed tribunal.

33% of the in-house counsel interviewedraised concerns over limited availability ofarbitrators with sufficient breadth of

experience. They expressed a strong desireto have a wider pool of experiencedarbitrators. However, none was willing toappoint an inexperienced arbitrator in theircases. It is interesting to note that onequarter of the in-house counsel interviewedexpressed an interest in being appointed asarbitrators in the future.

8.3 Summary

• Corporations look for arbitrators with anestablished reputation in the internationalarbitration community

• Relevant industry and/or regional expertiseare increasingly desirable attributes of aninternational arbitrator

• Corporations continue to select arbitratorsfrom a narrow pool of established individuals.Although corporations would like a widerpool of arbitrators from which to choose, the importance they attach to reputationmight make it difficult to expand the poolquickly in the short term. As the popularity

of international arbitration increases, so willthe demand for the scarce specialists at thetop of the arbitration community

There is demand for a wider pool of arbitrators

9


Appointment of law firms

9.1 Perception: Corporations retaintheir usual external litigation counsel whenconducting international arbitration cases.

FALSE


Interviews with in-house counsel made clearthat they do not generally use their retainedexternal counsel for international arbitrationwork. 75% of the in-house counsel interviewedsaid that their corporations retain specialistarbitration firms or firms with a substantialinternational arbitration practice.

The in-house counsel interviewed considerthemselves increasingly sophisticated in their procurement of arbitration services,many stating that they had been involved in, or managed, international arbitrationproceedings in the past.

As a result, rather than turn to their usualexternal litigation counsel, interviewees saidthat when appointing arbitration counsel, theyseek a firm that specialises in internationalarbitration, is experienced in the subjectmatter of the dispute and has access tocounsel in the place of the dispute to provideregional expertise. Availability and reputationare also important criteria.

Interviewees said long standing relationsbetween corporations and specialist arbitrationlaw firms are considered to be beneficial forboth parties. These are typically one-to-onerelationships between the in-house counseland arbitration lawyers in an external firm.

9.3 Summary

• Corporations generally retain specialistarbitration counsel rather than their usualexternal litigation counsel to represent themin international arbitration proceedings

75%

25%

Use specialist arbitration firms

Use regular external counsel

Appointment of law firms for internationalarbitration cases

10


Cost

10.1 Perception: International arbitrationis considered to be less costly thantransnational litigation.

FALSE


Although some in the international arbitrationcommunity have argued that it is less expensiveto resolve disputes through arbitration thanthrough litigation, in recent years corporationshave complained that international arbitrationhas become increasingly costly. As Perception2 of this study shows, the study found thatseven out of eight online respondents identifiedexpense as a disadvantage of internationalarbitration; half of the respondents said it is themost significant disadvantage.

Costs related to arbitration can be dividedinto two main groups: arbitration costs and

counsel’s fees. Arbitration costs include thearbitrator’s fees, expenses connected with thehearings (e.g. hiring venue, translators’ fees),fees and expenses of any experts appointedby the tribunal and the administrative expensesof the arbitration institution, if the arbitrationis an institutional one.

Our research reveals that nearly two thirds(65%) of the respondents perceiveinternational arbitration to be more expensivethan transnational litigation and 23% believeit is about as costly as transnational litigation.However, responses were clearly conditionedby experience of the costs of litigation. Thesecan vary significantly according to jurisdiction,with the United States regarded as the mostexpensive jurisdiction in which to litigate.

Respondents were asked to indicate the total cost of their corporation’s most recentinternational arbitration case. 52% of thecases identified incurred costs ranging from$100,000 to $500,000. However, 12%incurred costs greater than $5 million.

We also asked respondents to indicate whatpercentage of total arbitration costs counsel’sfees represented in their corporation’s mostrecent international arbitration. The respondentsreported that in 64% of cases, counsel’s feeswere greater than 50% of the total cost of thearbitration. Whilst the costs of the arbitrationinstitution and tribunal may appear significant,their share of the overall expense is notregarded as excessive.

Arbitration costs are rising but stillrepresent value for money

26%

39%

23%

12%

More expensive to some extent

More expensive to a great extent

Costs about the same

Costs less

Is international arbitration more expensive thantransnational litigation?


The interviews with in-house counsel indicatethat corporations in developed countries areless concerned about the cost of arbitrationthan those in emerging economies. In addition, corporations from most commonlaw jurisdictions as well as several civil lawjurisdictions (such as Sweden, France, andItaly) consider the costs to be acceptablegiven the expertise of arbitrators and overall

quality of services provided. However, inemerging economies, the cost of arbitrationand lack of familiarity with the process maydiscourage many corporations from using it.As a result, and as explored in Perception 1,some of these corporations prefer litigation in their own courts, where the costs may bemore predictable and less burdensome.

10.3 Summary

• International arbitration is considered at leastas expensive as transnational litigation formiddle and smaller size cases. In larger,more complex cases, international arbitrationmay represent better value for money

• Most of the costs of international arbitrationare counsel’s costs. Although the costs ofthe arbitration institution and tribunal mayappear substantial in actual terms, theirshare of the overall expense of proceedingsis not regarded as excessive28%

36%

Counsel’s fees < 50%

Counsel’s fees 50%-74%

Counsel’s fees > 75%

36%

Counsel’s fees as percentage of the total cost of arbitration

12%

52%

14%

22%

$100k to $500k

$500k to $1 million

$1 million to $5 million

More than $5 million

Costs of recent international arbitration cases

11


Sophistication of users

11.1 Perception: In-house counselgenerally lack extensive experience in international arbitration; to gainmaximum benefit from this process they require the advice of externalcounsel with arbitration expertise.

PARTIALLY TRUE


Our study results indicate that many in-housecounsel in larger multinational corporationshave had some, and even considerable,experience in managing the arbitrationprocess. Of the in-house counsel interviewed,90% felt that they were informed aboutarbitration but wished to receive moretraining. 10% felt they lacked the necessaryin-house resources for arbitration.

It may come as a surprise to the arbitrationcommunity to find such a high percentage

of in-house counsel consider themselves to have sufficient resources to managearbitrations. While in-house counsel claim to be sophisticated enough to handlearbitration matters, some of our study’sfindings – for example, a willingness to dropdispute resolution clauses from contracts and the failure to fully appreciate the tacticalimportance of choosing the right seat –suggest that further education from specialistlawyers might be beneficial in somecorporations.

Those asking for training said it shouldspecifically address the design andnegotiation of dispute resolution clauses,updates on arbitration law and practice, tools and tactics, venue choice, and theenforcement of awards. The commercialbenefits of this training and the resultingexperience could lead to:

• A greater appreciation of the tools andtactics available in international arbitrationproceedings

• Improved drafting of dispute resolutionclauses in contracts

• More effective management of arbitrationcases

• Eventually, a wider pool of arbitrators fromwhich to draw

11.3 Summary

• 90% of lawyers felt well informed aboutinternational arbitration proceedings but indicated they would benefit fromfurther training

• Other evidence in this study confirms thereis scope for additional education in criticalaspects of international arbitration

In-house counsel are becoming more sophisticatedpurchasers of arbitration services

12


The future of internationalarbitration

12.1 Perception: Corporations willcontinue to use international arbitrationas the preferred means of resolvingcross border disputes.

TRUE


Will international corporations continue to optfor arbitration? How will increased demand for arbitration expertise be accommodated?What aspects of the arbitration process shouldbe changed or improved? The answers tothese questions will help shape the future ofarbitration as a valued resource in resolvingcross border disputes.

According to our study results, 95% of thecorporations currently employing internationalarbitration will continue to use it. All intervieweesexpressed the view that the expansion of

international trade will result in a steadyincrease in arbitration cases.

Respondents also highlighted major issues of concern, including:

• The need to improve the framework formultiparty, multi-contract, and multi-claimdisputes

• The need for more effective enforcement of interim measures

• The need for a mechanism to reducearbitration costs

• The need for more countries to becomemembers of the New York Convention

Our study findings point to other significantdevelopments. The first is the trend toward thedevelopment of more sophisticated disputeresolution policies. Increasingly, these will takethe form of escalating, multi-tiered disputeresolution procedures. Secondly, appeal on themerits will remain unattractive to corporations.As a result, in-house counsel will continue tofavour finality over the open-ended nature of amechanism for appealing awards. Finally, the

need for international arbitrators is steadilyincreasing and in-house counsel express aclear demand for a wider pool of high qualityarbitrators and strong regional arbitrationinstitutions.

12.3 Summary

• The outlook for international arbitration is extremely positive. 95% of corporationsexpect to continue using it, and a rise inarbitration cases is projected

• Arbitration users have concerns, includinghigh costs, difficulties in dealing with multi-party proceedings, and the currentlysmall pool of arbitrators

• In-house counsel appear confident thatarbitration law and practices will generate thesolutions required to meet future challenges

The outlook for international arbitrationis extremely positive


Appendices


The research element of this study wasconducted between 3 May and 31 October2005 by Ms. Emilia Onyema, LLB, LLM,MCIArb, employed at the time as PwC Research Fellow at the School of International Arbitration, Centre forCommercial Law Studies, Queen Mary,University of London, together with

Professor Dr. Loukas Mistelis, LLB (Hons,Athens), MLE (magna cum laude), Dr Iuris(summa cum laude) (Hanover), MCIArb,Advocate, Clive Schmitthoff Professor of Transnational Commercial Law andArbitration; Director, School of InternationalArbitration, Centre for Commercial LawStudies, Queen Mary, University of London.

The research comprised of two phases:

• Phase 1: an online questionnaire completedby 103 respondents. Respondents targetedwere: heads of legal departments, generalcounsel (or deputy), or counsel in charge ofarbitration/litigation in corporations involvedin cross border transactions. Informationtaken solely from this group is referred to as from “respondents” or “our online study”

• Phase 2: face-to-face and telephoneinterviews with 40 general counsel, heads of legal departments and other counsel (on the authority of the general counsel).Inter-views were based on a set of guidelinequestions and varied from 15 to 30 minutes(for telephone interviews) to two hours forface-to-face interviews. Information takensolely from this group is referred to as from“interviewees” or “from interviews”

20%

36%

19%

Head of Legal department

General Counsel

Counsel from Legal department

Deputy General Counsel

Other

8%

17%

Position of respondents/interviewees

29%

25%

More than US$5 billion

US$500 million to US$5 billion

Averaging US$500 million

Undisclosed

19%

27%

Annual turnover of respondent/intervieweecorporations

3%

30%

40%

Middle East

Europe

Asia

Africa

Americas

15%

3%

Geographic location of respondents/interviewees

12%

%

2%

15%

8%

11%

23%

6%

2%

4%

17%

0 10 20 30

Banking and Capital Markets

Unknown/Other

Telecommunications

Entertainment & Media

Retail & Consumer

Industrial Manufacturing

Engineering & Construction

Insurance

Automotive & Transportation

Energy, Oil & Gas

Respondents by industry sector

Methodology


All interviews were conducted in English andthe majority of the interviewees were (at least)bilingual. The responses from the onlinequestionnaire and interviews were collated,statistically analysed and interpreted.

Targeted corporations were those operatingin the top tier, and with significant involvementin cross border transactions. In the majority ofcases, participant corporations have offices inmore than one country.

Ultimately, it is corporations which are theusers of the dispute resolution serviceprovided by arbitrators and arbitration counseland, for this reason, this study explores theattitudes of corporations, not the views of theexternal counsel representing them.

GlossaryArbitration Institutions

AAA/ICDR – American Arbitration Association/International Centre for Dispute Resolution

ACICA – Australian Centre for International Commercial Arbitration

CANACO – Cámara Nacional de Comercio (Mexico)

CIETAC – China International Economic and Trade Arbitration Commission

CRCICA – Cairo Regional Centre for International Commercial Arbitration

HKIAC – Hong Kong International Arbitration Centre

ICC – International Chamber of Commerce

JCAA – Japan Commercial Arbitration Association

LCIA – London Court of International Arbitration

SIAC – Singapore International Arbitration Centre

SCC – Stockholm Chamber of Commerce


Region Country Name Telephone Email

Africa South Africa Colm Tonge +27 (11) 797 4007 [email protected]

Americas Argentina Jorge Bacher +54 (11) 4850 6801 [email protected]

Brazil Fabio Niccheri +55 (0) 11 3674 3859 [email protected]

Canada Robert White +1 (403) 509 7345 [email protected]

Mexico Luis Vite +52 (0) 55 5263 6000 [email protected]

United States Patricia Tilton +1 (713) 356 6098 [email protected]

Asia/Pacific China Jean Roux +86 (21) 6123 3988 [email protected]

Hong Kong John Mitchell +852 2289 2489 [email protected]

India Deepak Kapoor +91 (11) 4125 0000 [email protected]

Indonesia Rodney Hay +62 (21) 521 2901 [email protected]

Japan Owen Murray +81 (3) 6266 5579 [email protected]

Korea Hwa-Joo Bae +82 (2) 709 0800 [email protected]

Malaysia Shao Yen Chong +60 (3) 2693 1077 [email protected]

Singapore Subramaniam Iyer +65 6236 3388 [email protected]

Thailand Charles Ostick +66 (0) 2 344 1167 [email protected]

Region Country Name Telephone Email

Europe Austria Christine Catasta +43 1 501 88 1100 [email protected]

Belgium Rudy Hoskens +32 (0) 2 710 4307 [email protected]

Czech Republic Sirshar Qureshi +420 251 151 235 [email protected]

France Dominique Perrier +33 (0) 1 56 57 8017 [email protected]

Germany Michael Hammes +49 (0) 69 9585 5942 [email protected]

Hungary Michael Tallent +36 1 461 9663 [email protected]

Italy Franco Lagro +39 (0) 2 7785 593 [email protected]

Netherlands Bernard Prins +31 (0) 20 5684 351 [email protected]

Norway Gunnar Krosby +47 (0) 95 26 12 69 [email protected]

Poland Brian O’Brien +48 22 5234 485 [email protected]

Russia Roger Stanley +420 251 151 205 [email protected]

Spain Jose E Rovira +34 (0) 915 684 357 [email protected]

Sweden Ulf Sandlund +46 (0) 8 5553 3607 [email protected]

Switzerland John Wilkinson +41 (0) 5 8792 1750 [email protected]

Turkey Wayne Anthony +90 212 326 6152 [email protected]

United Kingdom Gerry Lagerberg +44 (0) 20 7213 5912 [email protected]

Middle East Dubai Michael Stevenson +971 (4) 3043 101 [email protected]

Egypt Nabil Diab +20 2 516 8027 [email protected]

Lebanon William George +961 1200 577 [email protected]

PricewaterhouseCoopers’ international arbitration network

www.pwc.com/arbitrationstudy

© 2006 PricewaterhouseCoopers. All rights reserved. ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.Designed by studioec4 18098 (05/06)

www.pwc.com/arbitrationstudy

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