1. Advantages of International Arbitration
Although litigation and arbitration share the same objective, i.e. the resolution of a dispute by a third party, they differ substantially. Most obviously, in arbitration, the hearings are held in private (see infra VIII.) and before a sole arbitrator (or an arbitral tribunal) who renders a final and binding arbitral award. An arbitrator is not a state court judge but rather a qualified individual, nominated by the parties to the dispute, and in institutional arbitration, generally, subject to an arbitral institution confirming such appointment (see infra III.).
There are numerous reasons why arbitration is selected over state court litigation in international business:
The parties to the dispute can freely choose their arbitrator(s) – hence, they may select an individual with the experience required in the particular case. An arbitrator does not have to be legally trained, although this will mostly be the case (see infra III.);
Arbitral procedures are private and generally confidential for the parties and the arbitrator(s) (see infra VIII.);
Arbitration allows parties to resolve an international dispute, involving parties from different jurisdictions, in a single neutral forum. Instead of bringing multiple proceedings in different jurisdictions the parties may opt for arbitration, choosing the seat for the arbitral proceedings in a neutral country.
Arbitrations are more flexible than state court proceedings. The procedure may be tailored to a particular case to make the best use of time, whilst still ensuring a proper consideration of the matters in dispute (see infra V.);
Arbitration is generally fasterthan litigation. In particular, arbitral tribunals are often quicker in reaching a final decision than national state courts. This results from the flexibility of the arbitration procedure itself, and in particular, due to the fact that there is no procedure for appeal or further judicial instance in arbitration proceedings (except for very severe reasons; see infra VII.);
Hearings may be held anywhere in the world that is convenient for the parties, and at any suitable time (including holidays or weekends); and
An arbitral award may, generally, be enforced just like a state court decision at the place of arbitration. In addition, it can be enforced in another country, provided the respective country has adopted the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (currently 159 signatory states) (see infra IX.).
Hence, arbitration is the preferred method for finally resolving commercial disputes if (i) the nature of the dispute requires particular expertise; (ii) the parties place value on privacy; (iii) they are not part of the same legal jurisdiction; (iv) the parties attach importance to a swift resolution of their case in dispute; and (v) enforcement could be required in a foreign country.
2. Institutional Arbitration vs ad hoc Arbitration
It is important to distinguish between institutional arbitration and ad hoc arbitration. Arbitral proceedings are either conducted under the auspices of an arbitral institution or ad hoc, generally, meaning without the involvement of any such institution.
2.1 Benefits of Institutional Arbitration
Regularly, the contract between the parties, containing an arbitration clause, will determine a particular institution to act as arbitration administrator. The benefits of institutional arbitration are in particular: (i) existing specific institutional rules and procedures that guarantee the arbitration commences and proceeds to a conclusion without undue delay; (ii) administrative assistance from institutions; (iii) lists of qualified arbitrators; (iv) appointment of arbitrators by the institution should the parties request it or be in default of making any such appointment; (v) physical facilities and support services for arbitrations; and (vi) fixed fees for arbitrators.
2.2 Ad hoc Arbitration
Ad hoc arbitration is a proceeding that is, generally, not administered by an institution, and, therefore, requires the parties to make their own arrangements. One common misunderstanding when comparing these two possibilities to conduct arbitral proceedings is that ad hoc arbitration is less expensive than institutional arbitration. At first sight, this seems to be true: In ad hoc arbitration there are no fees to be paid to an institution for administrative services. However, the administrative services that arbitral proceedings require do not cease to exist. In ad hoc arbitration the arbitrators themselves have to handle these administrative aspects, and they do not undertake these tasks without charging the parties. Furthermore, the negotiating power of the arbitrators with respect to their fees, regularly necessary in ad hoc arbitration, is rather high. This leads to the conclusion that ad hoc arbitration tends to be more expensive than institutional arbitration.
Parties nevertheless wishing to conclude an ad hoc arbitration clause have the option to negotiate a complete set of rules, establishing procedures which fit precisely their particular needs. Experience has shown that this approach requires significant time, attention and expense without providing assurance that the terms agreed will address all eventualities.
3. Post hoc Arbitration
If no arbitration agreement exists, but parties, nonetheless, wish to initiate arbitration proceedings after a dispute has arisen, the parties have the option of: (i) adopting the rules of an arbitral institution, amending provisions for selection of the arbitrator(s) and removing provisions for administration of the arbitration by the institution (where possible)1, (ii) incorporating statutory procedures such as the Austrian Arbitration Act (or applicable state law), or (iii) adopting rules crafted specifically for ad hoc arbitral proceedings such as the UNCITRAL Rules, which may be used for both domestic and international disputes.
1 This could trigger diverse complications as the bodies of the arbitral institutions are designed within a specific framework. See in detail A. Redfern et al., Redfern and Hunter on International Arbitration (6th ed., New York, Oxford University Press, 2015), para. 1-157 et seq.
4. Other Forms of Dispute Resolution
Increasingly, multi-tier clauses are inserted in international business contracts providing that the parties shall first undertake informal steps, before the parties commence arbitration or litigation as the case may be.
Accordingly, some contracts provide that if a dispute arises, the parties shall first endeavour to settle such dispute by negotiating “in good faith”. However, negotiations are only likely to succeed if the parties involved are capable of observing the substantial issues objectively. Obviously, it is hard to remain objective where vital interests are threatened and/or at stake.
Therefore, an impartial third party may be able to lead the parties’ discussions that otherwise are at risk of getting nowhere.
For this reason international contracts often provide that the parties shall first endeavour to settle any dispute by some other form of alternative dispute resolution (ADR), before commencing arbitration (or litigation as the case may be). These ADR methods typically involve mediation, or other forms of conciliation procedures (which are sometimes considered, depending on the wording of the clause, to constitute a pre-condition before the tribunal may assume jurisdiction). It is recognized by Austrian courts that such clauses are admissible. In terms of drafting, parties should ensure that the arbitration agreement remains operable.