Forms Of Alternative Dispute Resolution

The brief is in tow main parts, each with two subparts. Part A deals with advice in general to the client in relation to the alternatives available to resolve international commercial disputes. It will discuss litigation as one alternative and Alternative Dispute Resolution (ADR) as the other alternatives. The brief will discuss the various forms of ADR, namely negotiation, expert determination, mediation and arbitration. It will discuss the advantages of and disadvantages of each. The second part of Part A will deal with the proposed clauses that the client is advised to include in the contract. It will also provide reasons why the clauses should be included. The firs part o f part B of the brief will investigate jurisdiction in arbitration and the problem that can arise. It will look at the West Tankers case to show how the system is not working properly. The second part of part B will investigate investor state dispute resolution and will endeavour to show what is wrong with the current system and make some proposals to make it work better.

Introduction

In the factual matrix provided there are various different players who will become part of the transaction. The first party is the client Altair Plc incorporated in the UK and with its main place of business in the UK. Secondly there is Lucky 8 who is a joint venture between the nominees of ministers of the state of Nyanza who is involved in their private capacity. The nominees are minority shareholders. The other two joint venture partners are a Chinese engineering company and a Middle Eastern State wealth fund

As there are entities of four different countries involved the possibilities exist that the law of any of these countries can be applied in the absence of an agreement to determine the legal system that will apply. It will therefore be to the advantage of the clients if they agree on the jurisdiction of the law of one country to ensure certainty.

A further issue is the fact that the power station is a new design. As such the plans that the parties used are based on old designs. As the designs may change the possibility of a dispute and in fact of more than one dispute is very real. Lucky 8 will install the reactors and if their design does not fit in with the new power station design the parties will face litigation. There should therefore be sufficient provision for resolution of disputes between the parties.

The dispute resolution procedure will have to make provision for ongoing matters too as it will be too expensive and time consuming if the parties have to approach the court or refer the matter to arbitration every time that there is a minor dispute relating to the design and installation.

Discussion

Part 1

Litigation as a Means to Resolve Disputes

If the parties have not agreed on the manner to resolve any dispute between them, any dispute will in all probability be litigated in court. Litigation may not provide the desired results.

The party who sues in a specific court that that court has authority over the parties to hear the matter. As the courts are generally overworked, the court will not waste its time to hear a matter where its judgement cannot be enforced. A judgement that a successful party cannot enforce is of no use to the parties. The acquiring of jurisdiction is typically a problem that contributes to the delay of finalising litigation. [1] 

Other typical problems that crop up in formal litigation are the discovery process that in international litigation will invariably require parties to obtain the information from sources which is in another country [2] and of course the problem of enforcing a judgement in one country after it has been awarded in a another. [3] 

Forum shopping occurs when a party seeks a court that will hear the matter to its advantage. Sometimes the courts are not in favour of forum shopping as there may be no nexus between the court and the parties of the matter. It can further lead to an overcrowding of the courts and delay the hearing. Some jurisdictions have formal process serving systems and as the UK has an iinformal system of service of documents makes it has become the system of choice. [4] 

To ensure that the courts have jurisdiction the UK the courts will hear a matter if the habitual residence of a party for the past 12 months is the UK. [5] Altair is a company that has been incorporated in the UK and its centre of control is in the UK. The English courts will therefore have authority to hear any dispute between the parties. [6] The problem with this scenario is that the Altair may not be able to enforce a decision of the court. The fact that there are three other parties with two from different legal systems could be a major stumbling block to enforce any judgement.

There are other options available to the parties. The law where the contract is concluded will have authority to hear the matter. [7] This option is not without its own problems as the place of signing of the contract may have no bearing on where the contract is to be performed. In this matrix of facts the signing of the contract was for publicity purposes, although one can argue that the power plants will be installed (lex loci solutionis ) in Nyanza and its courts will have jurisdiction to hear the matter. [8] O’Brien does however say that the old maxim locus regit actum (the law of the place governs the deed) has real merit. [9] 

There is a real connection between the performance of the contract and the place where it is to be performed. The major weakness of choosing the lex loci solutionis is that it does not necessarily identify a single system of law. An international contract may have different places where acts of performance have to be performed and it may not be possible to identify one legal system as more important than the other. [10] It may well be that parts of the power plants will be manufactured in the UK.

In the absence of an agreement between the parties the court may search for an implied choice. [11] The courts may search for the legal system with which the contract is most closely connected. [12] 

In the absence of an agreement as to which courts and legal system will apply to the relationship, if one party sues in the PRC and the defendant files a defence, it will be deemed that the defendant has submitted to the court’s jurisdiction by the act of filing a defence. [13] 

Article 246 of the Civil Procedure Law provides that the Chinese courts have exclusive jurisdiction in litigation relating to Chinese – foreign equity joint venture contracts. [14] The danger here is therefore that the Chinese courts may refuse to enforce a judgement from another country.

In the absence of an agreement all four different legal systems may find application. This is an unfortunate result. Except for the two common law jurisdictions the results from the other two jurisdictions may be completely different from what Altair intended. Although the legal system of Nyanza is a common law system there is no indication that its law did not develop differently since it became independent. It is therefore recommended that the parties agree on the method that disputes between them should be resolved.

The biggest objection against the parties not choosing a forum is that it is a guess as to which law will apply and the parties cannot properly prepare for vague matters. The Civil Procedure Law provides that even though party may have instituted proceedings in another forum, the Chinese Court can still accept the matter and in the absence of a treaty with the other country, it will not permit recognition and enforcement of judgements of foreign courts in such a case. [15] Even if the parties choose a court, the court may transfer the matter to another court in a foreign jurisdiction. [16] 

Another drawback of using the court system of any country is that it is the time it takes to finalise litigation matters. In a typical judicial system a dispute between parties from different countries can take as long as 10 years to become fully resolved. [17] The costs involved in litigation can also substantially reduce the number of risks a company may be willing to take. The state of the economy between the day that the dispute arises and its final resolution may alter the bargaining relationship between the parties. [18] 

Alternative Dispute Resolution (ADR)

ADR includes negotiation, expert determination, mediation and arbitration. The parties can agree to negotiate any dispute between them until they find a solution or in the absence of a solution to provide for further measures. The advantage of negotiation is that it is cost effective and a quick solution. The disadvantage that can arise is the different cultures of all the parties.

Expert determination is when a third party expert is appointed to make a determination and the parties agree to be bound by such determination. Expert determination may be useful when the subject matter of the dispute is highly technical. The disadvantage is that your own experts may not agree with the expert’s determination.

Mediation is the cornerstone of the Chinese system of dispute resolution. It plays a prominent role in traditional and contemporary China. [19] Chinese businesses also include specific rules such as contained in the UNCITRAL Conciliation Rules in their agreements. [20] Mediation is a third party assisted agreement between parties and is generally a cheap and expedient method to resolve issues. If the mediation fails the parties will normally agree to have the matter determined by arbitration (med/arb). The disadvantage of mediation is that any party can walk out at any time or the mediation can fail as the mediator can not make any binding finding. The mediator assists the parties to come to an agreement.

The biggest advantage of using ADR is that it is expedient and cheaper than traditional litigation. [21] 

Arbitration is generally lower in costs and can be distributed between the parties. In a typical litigation matter the costs will follow the successful party. [22] 

The parties cannot choose the judge in litigation but they are free to choose the arbitrator and generally will choose an arbitrator who has experience in the area of the dispute. A skilful arbitrator can acknowledge and reconcile different cultural, legal and social norms when he or she reaches a decision. [23] The choice of a neutral arbitrator will remove the bias that parties will feel if an arbitrator of the country of one of the parties are appointed.

The use of arbitration in resolving disputes between parties provides a private system of resolution to the dispute and most businesses prefer privacy as it allows them to control the flow of information and avoid the damage of publicity from an adverse award. It will also reduce the flood of copycat litigation. [24] 

Although the use of arbitration is attractive there are also negative consequences. Arbitration will only work if the arbitrator is committed to make a fair and expeditious decision. The arbitrator must bear in mind the social, cultural and political objectives of the parties to the dispute. [25] If the arbitrator exhibits prejudice, the offended party may consider the process as unsuccessful regardless of the outcome.

As arbitration is not bound by the stare decisis rule, the arbiters are not bound by previous findings and inconsistencies may arise. The result is that parties are not always sure of the expected result. In a litigation one can look at previous decisions and get an idea as to the way the court will decide. [26] The parties can avoid the issue by clearly defining what procedural and substantive rules will govern the transaction. [27] 

Lastly a major concern that exists is that a party may not be able to enforce an award that may be issued. The effectiveness of international arbitration depends on substantial government and inter-government support. In the absence of reassurance that an award will be enforced, arbitration on the international scene will not work. [28] Governments play a significant role in encouraging arbitration. The support of governments for arbitration has ensured that businesses know that their choice to use arbitration is supported and will be enforced by governments. [29] A major stumbling block for successful arbitration exists in transitioning countries as they are undergoing dramatic economic, political or social change and face many challenges. [30] 

Part 2

The parties should agree on the rules that will apply in the event that a dispute arises in relation to a matter covered by the agreement. In the absence of an agreement, the parties are faced with the uncertainty of litigation in an international environment. [31] In the absence of an agreement the disputing parties are left to either negotiate a resolution to the problem or to approach a court for relief. The problem with trying to negotiate a resolution is that the parties are now at odds with each other and the likelihood of success is slim. The agreement to arbitrate must be in writing otherwise the courts may find that there was no agreement to arbitration. [32] 

Altair should include an arbitration clause in its contract with Lucky 8. In the absence of an agreement to arbitrate, Altair should at least negotiate a clause that will provide for English common law to apply to the contract and then there will be some predictability as to a likely outcome of any litigation.

In the absence of specific rules as to the form of the arbitration, the parties can agree that all disputes will be determined by using the UNCITRAL Model Law on International Commercial Arbitration. [33] By including such a clause the parties will be certain of the procedure that will be followed.

Since the design is still in its development phase it is inevitable that there will be disputes about the design. If the dispute relates to the design of the power station and the question as to whether it is suitable for the circumstances the parties should include a clause in the agreement to provide for negotiation or expert determination.The person that they appoint can be someone who is recognised as an expert by all the parties. The contract should further provide that the parties will be bound by the decision of the expert. The expert should act as such and not as an arbitrator. The advantage of using an expert in such circumstances is that it is expeditious and relatively cheap. It will also not hold up the installation of the power station.

A broadly drafted arbitration clause will ensure that any dispute that may arise can be referred to arbitration. The courts have held that clauses that provide for “any dispute or difference which may arise in respect of this agreement" or "any provision" to be wide enough to embrace any dispute that may arise out of the agreement. [34] 

Arbitration clauses should be drafted as widely as possible. [35] Some writers prefer short and simple arbitration clauses. [36] The London Court of International Arbitration (LCIA) recommends the following clause:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause

The number of arbitrators shall be [one/three]

The seat, or legal place, of arbitration shall be [city and/or country]

The language to be used in the arbitral proceedings shall be [ ]

The governing law of the contract shall be the substantive law of [ ]" [37] 

It is recommended that this clause be inserted into the

The parties should further include the rules developed by the International Bar Association (IBA) relating to the taking of evidence and the ethical rules to apply to international arbitration. [38] 

The parties should also agree which legal system will apply and where the arbitration must take place. In light of the fact that the parties may not fully trust each other, they are advised to arrange a neutral venue for the arbitration. Altair should hold out for the application of English Common law as both there are at least two entities who are familiar with it.

Part B

Abstract

The second part of the brief will discuss the problem of jurisdiction in international arbitration matters. It will refer to the Allianz judgement of the ECJ and will endeavour to show that the lack of proper rules caused the parties to embark on expensive litigation to acquire an injunction to restrain the other party from proceedings in a court of Member State only to find that despite the fact that the Regulation (EC) 44/2001 excluded arbitration the ECJ held that the only court with jurisdiction was the court where the proceedings were issued and not the court of the legal system that the parties agreed upon.

Arbitration

Jurisdictional Issues

The rise of arbitration as a dispute resolution tool has allowed different countries to interconnect within a region and outside its limits. [39] The use of arbitration has been actively encouraged by the legislatures of various States. This is not only true of the Americas but also in other regions and countries. The UNICTRAL Model Law on International Commercial Arbitration has been adopted by many countries. In the Americas alone it has been adopted with slight variations in 11 countries in the Americas. [40] 

In arbitration agreements the parties will often agree which legal system will apply to the agreement and where the arbitration will be undertaken. On the face of it, it appears that such an agreement is easily enforceable since it quite clearly sets out the rules that will apply in the case of a dispute.

When one pauses to read the judgement of the European Court of Justice in Allianz SpA [41] , one will quickly realise that it is not that simple. A vessel owned by West Tankers and chartered by Erg Petroli SpA collided in Syracuse (Italy) with a jetty owned by Erg.

The charterparty was governed by English Law and contained a clause providing for arbitration in London in the United Kingdom. Erg claimed for payment from the insurance company up to the limit of its insurance cover and instituted arbitration proceedings for the balance pursuant to the agreement against West Tankers in London. West Tankers denied liability.

In the meantime the insurance company instituted proceedings against West Tankers before the Tribunal in Italy. West Tankers raised an objection of lack of jurisdiction based on the existence of the arbitration agreement. It should be noted that the insurance company was acting in accordance with the principles of subrogation. [42] 

At the same time West Tankers issued parallel proceedings before the High Court of Justice of England and Wales seeking a declaration that the dispute had to be settled pursuant to the arbitration agreement between the parties. West Tankers further applied for an injunction requiring the insurance company to discontinue the proceedings commenced in Italy. [43] 

West Tankers were successful in the court of first instance, but Allianz appealed the decision to the House of Lords arguing that the granting of the injunction was contrary to Regulation (EC) 44/2001.

Before we discuss the judgement further the legal context will be discussed. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) [44] provides in Article II(3) that the court of a contracting state will refer the parties to arbitration if that is what they agreed unless the court finds that the agreement is for some reason null and void.

Council Regulation (EC) 44/2001 of 22 December 2000 [45] does not apply to arbitration. It does however provide that a person domiciled in one Member State may be sued in another Member State. [46] 

It therefore appears that there are two issues involved. The first is that Allianz was entitled to sue West Tankers in Italy as it has done and the other is that Regulation (EC) 44/2001 does not apply to arbitration.

In two previous decisions the ECJ held that an injunction cannot be issued in one court of a Member State restraining a party from commencing proceedings or continuing proceedings in a court of another Member State. The issuing of such an injunction was not compatible with Regulation (EC) 44/2001 as it required courts of different member states to trust that the other court will do its job properly. [47] 

The House of Lords were of the opinion that as arbitration was excluded from the ambit of Regulation (EC) 44/2001 it was within its power to grant such an injunction. The matter was referred to the ECJ for a preliminary ruling.

The ECJ held that even though some proceedings do not come within the scope of the Regulation, the consequences of such proceedings may undermine the effectiveness of the Regulation which is the unification of the rules of conflict of jurisdiction in civil and commercial matters and the free movement of decisions in those matters. [48] 

The ECJ therefore held that the court in Italy had exclusive jurisdiction to hear the objection to jurisdiction and the courts of England will be bound by that decision.

This case illustrates the need for uniformity in proceedings when the issue of jurisdiction is in question. One would expect that as the parties chose English Law and London based arbitration, they also subjected themselves to the jurisdiction of the English courts in relation to issues arising out of their relationship.

The fact that the jurisdiction was removed from the English courts meant that another legal system was adopted to decide on the issue of jurisdiction and whether the matter should be adjudicated by arbitration. The parties have chosen the English system and not the Italian system for a reason.

It is suggested that the rules relating to arbitration should be harmonised with the idea of arbitration. If parties choose the legal system of one country and its arbitration procedures then the courts of that country should have exclusive jurisdiction over the matter.

In this case the parties had to embark on costly litigation only to find that both the English courts got it wrong that they should have relied on the Italian court to uphold their request that the matter be arbitrated.

Investor State Dispute Resolution

There has been unparalleled growth in international investment and in response there has been a rapid growth in the number of international investment treaties among States. The total number of international investment treaties is nearly 2500 and involve some 180 different countries. [49] 

The various bilateral investment treaties (BIT) have given investors a remedy that they did not have before. They could now act against host States in the case of a dispute. This has led to an increase in investor - State arbitration.

An investor – State arbitration is a costly, time consuming and risky process that can only end up destroying whatever business relationship existed between the parties. [50] Another problem is that in investor –State arbitration the final award by the arbitrator may not be final and binding on the parties.

Investors will first investigate the alternatives available to it and may find that the only option is investor-State arbitration. Saracuse proposes that if the parties are able to find an alternative dispute resolution method than investor State arbitration, they may be able to develop efficient alternatives to arbitration, the costs of dispute resolution may decline and the working relationship between the parties may still be intact after the dispute has been resolved. [51] 

The further parties move along the continuum of conflict the more the parties will lose control of their dispute and will it be subject to the actions of third parties. In negotiation the parties are in control whilst in mediation there is a third party that will assist them to find a solution. In arbitration the parties have laid down the rules but the ultimate decision lies with the arbitrator and in litigation the parties have no control over the rules or the outcome. [52] 

If the parties wish to maintain their business relationship the last thing they will want to do is to litigate or to arbitrate the matter. Litigation and investor – State arbitration will lead only to one conclusion and that is that one of the parties must pay the other a sum of money.

Few investment treaties specifically authorise the use of ADR. When I refer to ADR in this context I am excluding arbitration. Most investment treaties provide that in the event of a dispute the parties will in the first instance seek to resolve the dispute by consultation and negotiations. [53] Other treaties only recognise conciliation and if that does not succeed then the parties must turn to arbitration. [54] 

Some BIT’s provide for third party assisted dispute resolution. The United States in their BIT with Turkey provide for such a procedure. The United States Model BIT (2004) provides for third party assisted resolution. [55] It appears that the United States may be ahead of the other countries in recognising the importance of maintaining the relationship by alternative dispute resolution.

One of the possible reasons why host countries do not resort to ADR may be related to the fact that they lack experience in this area. It may also be that they are afraid that they may be viewed as politically weak if they propose ADR. [56] 

Another alternative method to resolve the dispute is by conciliation. Conciliation is normally governed by a set of rules. The International Centre for Settlement of Investment Disputes (CSID) has such a set of rules. [57] Conciliation is a rights based approach and the conciliators focus mainly on the substance of the dispute. It affords the parties the evaluation of a third party as their rights and obligations. [58] 

Instead of embarking on the expensive time consuming investor-State arbitration the parties will be better off to use either mediation or conciliation. In both instances the parties are in control of the outcome and they can withdraw whenever they wish to do so.

I propose that the various governments embark on an education program to educate the investors and the host governments who do not have experience with ADR to enable them to make more use of these alternative methods. Secondly when states enter into BIT’s they should make the ADR methods described above compulsory before the parties can revert to arbitration or litigation.

One example of a successful conciliation was when Lord Wilberforce successfully conciliated the distribution of US$143 million profits between Tesoro Petroleum Corporation and the State of Trinidad Tobago. It took less than 2 years to resolve the dispute at a cost of US$11,000.00. [59] It is remarkable that the amount involved was so high and yet the matter was resolved at a cost of US$11,000.00.

It is clear that alternative methods of dispute resolution in the area of investor – State dispute resolution.

Bibliography

Books

Alibekova A., & Carrow R., International Arbitration and Mediation: From the Professional’s Perspective (2007) Yorkhill Law Publishing

Lew D.M, Mistellis L, Kroll S., Comparative International Commercial Arbitration (2003) The Hague: Kluwer Law International

O’Brien J., Conflict of Laws (1999) Cavendish Publishing

Pryles M., Dispute Resolution in Asia (2006) Kluwer Law International

Reisman, W. M., Systems of Control in International Adjudication and Arbitration Breakdown and Repair (1992) Duke University Press

Cases

Allianz SpA, formerly Riunione Adriatica Sicurta SpA, General Assicurazioni Generali SpA v West Tankers Inc Case no: C-185/07 available at <http://www.tradewinds.no/multimedia/archive/00105/Allianz_and_General_105885a.pdf> as at 6 April 2010

Azov Shipping Co v Baltic Shipping Co 2 Lloyd’s Rep (1999) 159

Bonython v Commonwealth [1951] AC 201

Boys v Chaplin [1971] AC 356

Case C-159/02 Turner v Grovit & Others [2004] available at < http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62002J0159:EN:HTML> as at 6 April 2010

Case C-116/02 Gasser GmbH v MISAT Sri [2003] available at <http://curia.europa.eu/common/recdoc/convention/gemdoc2004/pdf/Z_en_01.pdf> as at 6 April 2010

Cesena Sulphur Co v Nicholson (1876) 1 Ex D 428

Heyman v Darwin Ltd AC (1942) 356 (HL)

John Kaldor Fabricmaker Pty Ltd v Mitchell Coots Freight (Aust) Pty Ltd (1989) 18 NSWLR 172