CHAPTER 11 THE "BUSINESS CASE" FOR AND AGAINST INTERNATIONAL ARBITRATION

• Jurisdiction: United States

International Energy and Minerals Arbitration
(Sep 2013)
CHAPTER 11
THE "BUSINESS CASE" FOR AND AGAINST INTERNATIONAL ARBITRATION
Andrew de Lotbinière McDougall ¹
Partner, White & Case
Paris, France
Kirsten Odynski
Associate, White & Case
Paris, France

ANDREW DE LOTBINIÈRE MCDOUGALL is a partner in the International Arbitration Practice of White & Case LLP based in Paris. He has substantial oral advocacy experience in English and French and acts as counsel and arbitrator in cross-border disputes involving, among other things, joint ventures, oil & gas, construction, mergers & acquisitions, intellectual property, telecommunications, defence, power, mining, and other natural resources. He is trained and qualified in common law and civil law and has worked with the laws of numerous jurisdictions, representing clients from around the world in disputes of up to several billion dollars. Ranked in 2011 among Global Arbitration Review's 45 Under 45 as one of the leading international arbitration lawyers in the world, and selected as one of Lexpert's 2009 Rising Stars: Leading Lawyers Under 40, Andrew "is a seasoned international arbitrator" (Chambers Global, 2013) and "a leader in the new generation of stars" (Who's Who Legal, 2013). Andrew is a member of the International Chamber of Commerce's Commission on Arbitration and Canadian and French National Committees. He is also on the Roster of Arbitrators of the International Centre for Dispute Resolution and the Sport Dispute Resolution Centre of Canada. A frequent speaker and writer, Andrew has taught international arbitration at Université Paris 1 Panthéon-Sorbonne and University of Ottawa's Faculty of Law. He has extensive experience in international arbitration advocacy training and is a member of the Foundation for International Arbitration Advocacy's Executive Committee. He is a graduate of Université Laval in Québec City and University of Ottawa, where he received the prize for the highest standing in trial advocacy. He is also a former Fox Scholar.

Introduction

A 2013 survey conducted by PricewaterhouseCoopers and Queen Mary, University of London found that corporations across all sectors refer as many disputes to international arbitration (47%) as they do to litigation (47%).² These survey results indicate that while international arbitration is a popular method for resolving disputes, corporations must regularly make the choice between international arbitration and litigation, and the two methods are equally important.

In the case of complex cross-border transactions, the choice between international arbitration and litigation is a complex one requiring consideration of a number of factors. The following table sets out some well-known pros and cons of international arbitration and of litigation with the caveat that no list is perfect, and views vary on what is an advantage and disadvantage:

International Arbitration	Litigation
Pros	Neutrality (tribunal, procedure, place, language)	Procedural certainty
Right to choose arbitrators	Summary disposition
Arbitral institutions	Coercive powers
Procedural flexibility	May be more effective when a party is recalcitrant
Privacy	Right to appeal
Finality
International enforceability of awards
Cons	Can be difficult when recalcitrant party	Lack of neutrality
Risk of jurisdictional disputes	Expensive discovery process in common law countries
Multi-party and multi-contract challenges	Can be lengthy
Arbitrator's lack of coercive powers	Lack of privacy
Difficulty to have summary proceedings	Judges and juries lack technical expertise
Costly compared to litigation in civil law countries	Lack of finality
Awards cannot be appealed	Limits on international enforceability

This paper will consider these pros and cons in assessing the "business case" for and against international arbitration. Specifically, this paper will consider whether international arbitration can help manage six business risks common in cross-border transactions. The six business risks examined in this paper are the risks of:

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(1) Operating in a given country

(2) Commercially sensitive or technical disputes

(3) Lengthy or costly proceedings

(4) Multiple contracts

(5) Multiple parties

(6) Enforceability

Many of the pros and cons listed in the table above are relevant to each of these business risks. This paper does not aim to present an exhaustive analysis of each of the factors on this list. Rather, the aim of this paper is to identify and assess the effectiveness of some of the tools that can be used to manage each of these risks.

I. Operating in a given country

A. What are the business risks?

Cross-border transactions by definition involve multiple jurisdictions. Frequently, the subject of the investment or transaction will be located in a country other than a corporation's home country. The degree of risk posed by operating in a given host-country varies. The degree of risk is likely to be lesser in stable or so-called developed countries such as those in North America and Western Europe and is likely to greater in unstable or so-called developing countries such as Algeria, the Congo, Venezuela, China or Kazakhstan. The risks of operating in a given country can be categorized as follows:

• Political and legislative risks

• Industry risks

• Judicial risks

Political and legislative risks are caused by government acts or other events including expropriations, the imposition of exchange controls, revolutions and other civil disturbances that may have an adverse impact on transactions or investments.³ An example of a government act falling into this category is Argentina's decision in April 2012 to renationalize Repsol's 57% shareholding in the oil company YPF SA.⁴ An example of an event is the "Arab Spring", which may adversely impact international projects in the Middle East and Africa.

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Industry risks result from a given government's tendency to exert control over domestic natural resources. This tendency, also referred to as resource nationalism, can be triggered by a variety of events such as increased demand for energy, prolonged conflicts, international embargos, or concerns about energy security.⁵ Governments can exert control over natural resources by limiting foreign investment, changing the terms of existing contracts to maximize revenue, or by engaging in other forms of economic coercion.⁶ Two recent examples of resource nationalism include a 2001 Hydrocarbon Law in Venezuela prohibiting investors from owning more than 50% of upstream oil activities in the Orinoco Oil Belt⁷ and a 2008 Strategic Investment Law in Russia which places various limits on foreign ownership.⁸

Judicial risks result because the justice system in a given country has a poor reputation for neutrality and impartiality or may be corrupt. Judicial risks may arise where there is a possibility that the State will interfere with the judicial proceedings. State interference may be likely where the subject of the dispute is a government act or one of the parties to the dispute is a State-controlled entity. Judicial risks may also arise when decisions in the justice system in a country can be "bought". Transparency International's Corruption Perceptions Index, which ranks countries on how corrupt the public sector is perceived to be, is one measure of the judicial risk in a given country.⁹ The 2012 Corruption Perceptions Index found that 70% of countries scored less than 50 out of 100.¹⁰

B. Can international arbitration help manage the business risks?

International arbitration is an effective way to mitigate the risks of operating in a given country. This is because it is possible for the forum for dispute resolution to be somewhere other than that country. Parties can select a seat or place of arbitration anywhere in the world. The seat does not have to be connected to the nationality of the parties, the location of the investment, or even the substantive law of contract. As such, the parties are free to agree on a neutral location free from perceived or actual bias and corruption. The ability to select a location other than the given country in which one is operating may be particularly advantageous where States or State-owned entities are involved.

In addition, parties to an international arbitration can further mitigate the business risks of operating in a given country by electing to use an international arbitral institution to administer their arbitration. Generally, international arbitral institutions are neutral and independent bodies that provide services aimed at facilitating the dispute resolution process. Services provided include assistance appointing the arbitral tribunal, assistance facilitating the resolution of urgent disputes, assisting with the logistics of the arbitration, fixing

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arbitrator remuneration, and stepping in to address possible complications with the commencement of the arbitration proceedings such as arbitrator or jurisdictional challenges. It should be noted that not all arbitral institutions are neutral and independent of the country they are located in. With the proliferation of arbitral institutions around the world, parties should choose their arbitral institution carefully to ensure that the one used is truly neutral and independent.

In sum, the selection of a neutral place of arbitration and the use of a well-established international arbitral institution can be effective ways to manage the business risks of operating in a given country. By way of comparison, it is more difficult to manage business risks of this nature with litigation. In general, jurisdiction over a given dispute and a given contracting party will likely only be found in the courts of the parties' to the dispute. Thus, at least one party is likely to feel that they are at a disadvantage because the...