What Is International Arbitration?

International Arbitration Explained

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International arbitration is a process of dispute resolution that works similarly to arbitration in the U.S. In international arbitration, disputes are settled by a specific process that includes an arbitrator.

Learn more about the process of international arbitration.

What Is International Arbitration? 

With the increasing globalization of trade and business after WW II, there was a need for an arbitration process that could work between companies in different countries. A treaty called the New York Arbitration Convention was agreed on in 1959. The New York Convention has been adopted by 154 of the UN members, and more than 65 countries have participated in arbitration decisions.

Since that time, other conventions have been established. In the U.S., the Federal Arbitration Act includes the New York Convention, which states that this convention "shall be enforced in United States courts."

International arbitration "provide[s] businesses engaged in international transactions with a neutral forum for dispute resolution," according to BG Group, PLC v. Republic of Argentina. Arbitration is one of the processes of alternative dispute resolution; that is, it is used instead of litigation (going to court) to resolve disputes. Arbitration can be optional, but more and more contracts include a mandatory arbitration clause that requires using arbitration in disputes rather than litigation. 

In arbitration, both parties agree on an arbitrator who hears both sides of the case and issues a decision. Unlike mediation, the decision of the arbitrator is binding on the parties. 

How Does International Arbitration Work? 

Imagine a dispute between companies in two different countries. Which court has jurisdiction? Which country's laws should be followed? In these cases, having a neutral process that everyone accepts makes settling these between-country disputes much easier. 

There are multiple arbitration associations that operate under the New York Convention or other conventions. To begin an arbitration, a request for arbitration must be filed with one of these associations. One of the largest of these associations is the International Chamber of Commerce (ICC); here's how their process works. 

  1. Request for arbitration and answer: Let's say you want to request an arbitration over an issue with a customer in another country. You would go to the ICC and file a request and pay $5,000 for administrative costs and filing fees. In the request, you must state the nature of the dispute and the basis on which the claim is being made. You must also state what resolution you want, including any monetary damages if those can be stated. An arbitration agreement between the two parties must have been signed. The ICC transmits your request to the other party, which must respond within 30 days. 
  2. Before the tribunal: If the other party has issues with the arbitration agreement, or it doesn't respond, the ICC will rule on these questions. The ICC will also require an advance on costs (the arbitration agreement should have specified how arbitration costs are to be paid; they are usually shared). 
  3. The tribunal: After some other preliminary procedures and the tribunal (one or more arbitrators) has been set up, it begins its work. Most of these meetings are conducted by teleconference. The process itself is flexible, based on agreements between the parties and the tribunal. Witnesses and experts may be heard as well as the parties involved. 
  4. After the tribunal: When the tribunal has made its decision, the timetable for the final award is set and submitted to the ICC International Court of Arbitration. 

Creating an International Arbitration Agreement

If you do business with customers, vendors, or employees in other countries, consider creating an international arbitration agreement or adding an international arbitration clause to your contracts. The clause, as suggested by the International Chamber of Commerce, would state that all disputes arising from the contract "shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules."

The Benefits of International Arbitration

The primary benefit of international arbitration is that it is enforceable, where litigation (court cases) between business entities in different countries may not be. It is also set up with the consent of both parties and results are kept private in most cases. Other benefits are similar to arbitration in the U.S.: it is a faster and less expensive process than litigation. ​

Without international arbitration, the only way to take someone to arbitration in another country would be to use that country's laws. This is often not a workable option. Let's say you wanted to use arbitration with a customer in Germany. That means finding an arbitrator who can speak German and who can work in Germany. You would be at a disadvantage because German laws and arbitration procedures might favor the customer.

Key Takeaways

  • International arbitration is a process of dispute resolution between parties from different countries that includes an arbitrator.
  • Arbitration is an alternative to litigation. 
  • There are multiple arbitration associations that operate under the New York Convention or other conventions. 
  • Businesses with international operations should consider an arbitration clause. 
  • The primary benefit of international arbitration is that it's enforceable.