Going International? Consider Arbitration

Your client, headquartered in the United States, asks you to prepare an agreement. Let’s say it’s a supply agreement.  The supplier is from a foreign country.  Let’s say China.  You are fairly sure that the supplier, eager to make the ongoing sale of its products, will agree to a United States choice of law and to having any disputes determined in the U.S.  That all seems easy.

Possible enforcement

Then you start to think it through further.  What if the parties  have a dispute, and your client obtains a judgment, an injunction, or some other relief?  How will you enforce it in China?

You do some quick research. In the last few days you see an article on-line from a Chinese law firm announcing that, recently, the Intermediate People’s Court in Wuhan, China recognized a default judgment entered against a defendant in Los Angeles Superior Court.  That seems promising, but why is that noteworthy?  You read on.

Problems with enforcement

China has not entered into a treaty with the United States on recognition of foreign judgments with the United States.  So the case was decided on reciprocity principals.  If the foreign tribunal has enforced Chinese judgments, then Chinese courts may also do so.  In this case, the plaintiff was able to show that United States courts have enforced Chinese judgments.  And this was a default, so it just involved “judicial assistance,” rather than an adjudication of substantive rights and obligations.

As you search further, you learn that Chinese courts generally have not enforced US judgments, primarily because there is no treaty regarding court judgments.

None of this gives you a great deal of comfort.  What should you do?

Consider arbitration

China and the U.S. are “contracting nations” under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the “New York Convention.”  China has generally limited the types of awards recognized to commercial matters and has excluded international investment arbitration awards.  But this is good news.  Any issue your client will have with the Chinese party will be commercial.  Although it is not likely to be easy, given the distance and difference in legal systems, an arbitration Award in your commercial matter should be recognized in China.

You are a cautious sort, so you check with your partner who practices international law.  He confirms that, in many countries, arbitration awards will be enforced even though U.S. court judgments will not. This seems strange to you, given the heightened due process often available in court as opposed to the relative informality of arbitration.  “It’s all a matter of treaties,” he explains.  “The New York Convention has been fairly popular around the world.  For a list, go to http://www.newyorkconvention.org/countries.”

“But be careful,” he cautions.  “You will still want to check the specifics of each state before you rely too much on that.  Afghanistan and Iran are signatories, for example, but you would want to learn much more about the current state of their court systems before getting too comfortable about actually enforcing your award.  Still, if the other party in your contract is from a ‘contracting nation,’ you have a legal structure for enforcing the award.”

Administration?

One more issues arises: should you do an administered or private arbitration?  I’ve written before about the pros and cons of administered arbitration.  Administration requires payment of fees to the organization, of course. But it can save time and money when it comes to initiating the arbitration, dealing with conflicts and possible partiality of the arbitrator, and general administrative matters.  I think that all tips the scales in favor of administration.

In the case of international arbitration, there isn’t much to consider.  Use a well-established organization.  Not only is the award more likely to be viewed as legitimate, but those organizations are experienced with international arbitration and are helpful in dealing with them.  I know, for example, the International Centre for  Dispute Resolution, — affiliated with the American Arbitration Association — specializes in international arbitration administration.  Its case managers are used to dealing with the New York Convention and its requirements. They  are quite helpful in identifying forms and procedures to be used in international matters.

There are a number of other international organizations you can use, including The International Court of Arbitration of the International Chamber of Commerce (“ICC”) and The London Court of International Arbitration (“LCIA”).  You will want to check their rules and rate structures depending on your specific matter.

Arbitration may be the answer

So now you have a new reason to consider arbitration.  Depending on the country of the party you are dealing with, you may be able to enforce the relief you obtain only if you arbitrate the dispute.