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International Practice: Topics and Trends
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Arbitrating International Controversies

  • I. Overview of Arbitration.

      1. Access to effective and efficient dispute resolution is an essential component of any business.  When businesses expand beyond their home market the resolution of disputes becomes more complex and presents challenges not faced in the domestic context.  To prepare for these cross-border disputes, companies may wish to enter into arbitration agreements in the hopes of obtaining a neutral, cost-effective, and fast-moving forum.  Though aimed at securing fair and efficient resolution of disagreements, international arbitration is not without pitfalls and provides no guarantee one will avoid the judicial system.

      2. Arbitration typically provides parties with greater procedural flexibility than litigation; in arbitration, parties are free to choose the rules and procedures that will govern the resolution of their dispute.  Parties may choose to select an arbitral forum that will govern procedure or to abide by the rules of an established arbitral institution.  Among these institutions are:  the International Chamber of Commerce (“ICC”), American Arbitration Association (“AAA”), and the London Court of International Arbitration (“LCIA”).  Parties are also free to craft their own procedural rules.  In the event that parties fail to select a law and procedure by which they will resolve their dispute, it will typically be the law of the country in which the arbitration is located.

        1. While the breadth of issues governed by agreed-upon rules of arbitration varies depending on the “host” country, one area of typical application is that the law of the forum will be looked to in order to ascertain the extent to which the courts can intervene in the dispute.  For example, the Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), June 10, 1958, 21 U.S.T. 2517 (enacted as chapter two of the Federal Arbitration Act), permits courts situated in the country where the arbitration occurred to be accessed to overturn or “vacate” arbitral awards.

        2. Absent agreement to the contrary, courts will intervene if an arbitration clause is vague or ambiguous in specifying which arbitral body's rules apply.  Courts may also step in to appoint an arbitrator when there is no specific provision guiding selection of arbitrators, when parties cannot agree, or when the arbitrator named by the parties is unable to hear the dispute.  Once the tribunal has been established, a district court does not have authority to overturn the selections until later when it is ruling on an application to vacate an award.

  • II. Efforts to Compel and to Avoid Arbitration

    • A. The Attraction and the Opposition to Arbitration.

      1. Frequently parties will be eager to compel or eager to resist the arbitration process.  Arbitration is a contract matter, and a party can only be compelled to submit disputes to arbitration where he has previously agreed to arbitrate.  Seeking to avoid dispute resolution before a court, parties can enter into a legally binding agreement to arbitrate rather than to litigate.  Because it is a relinquishment of a party’s courtroom rights, the decision to arbitrate must be express, and can occur before or after a dispute actually arises.  A pre-dispute agreement to arbitrate is usually encompassed in a clause in a commercial contract, while a post-dispute agreement typically stands alone.

      2. In an effort to avoid arbitration, a party can attempt to invalidate the arbitration agreement or clause, or it can endeavor to assert that the disputed issue is not governed by the arbitration agreement.  Whether a court or an arbitrator will hear and decide an issue depends upon the type of argument set forth by the petitioning party and the terms of the arbitration agreement.

    • B. Rent-A-Center v. Jackson

      1. Recently, in Rent-A-Center v. Jackson, No. 09-497 (June 24, 2010), the Supreme Court limited a court’s authority over arbitration agreements.  It held that if an agreement provides that an arbitrator will decide all issues pertaining to enforceability, an arbitrator, not a court, must decide the issue of enforcement.  In Jackson, an employee signed an agreement to arbitrate that granted the arbitrator authority to resolve any dispute relating to the enforceability or formation of the agreement.  Later, the employee filed an action against his employer and the trial court granted the employer’s motion to compel arbitration and dismiss the action.  The employee challenged the trial court's decision, arguing that the arbitration agreement was unconscionable and the issue of unconscionability should be determined by a court, not an arbitrator.  The Supreme Court held that under the Federal Arbitration Act (“FAA”) (codified at 9 U.S.C. § 1 et seq.), when an agreement grants an arbitrator authority to decide issues of enforceability, if a party challenges the enforceability of that particular delegation agreement, the district court should consider the challenge.  However, if a party challenges the enforceability of the agreement as a whole, the challenge is for an arbitrator.  In Jackson, because the employee did not challenge the provision granting exclusive authority to arbitrators for the resolution of enforceability questions, his challenge was found to be a challenge of the whole agreement and subject to an arbitrator’s review.

    • C. Granite Rock Co. v. International Brotherhood of Teamsters

      1. On the same day as Jackson, the Supreme Court also decided Granite Rock Co. v. International Brotherhood of Teamsters, No. 08-1214 (June 24, 2010), holding that the issue of formation of the arbitration agreement is a question properly decided by a court, not an arbitrator.  Rejecting the argument that arbitration was appropriate because of the “federal policy in favor of arbitration,” the Court held that because disputes are arbitral only if parties agree to arbitrate, a court must first determine if such agreement between the parties actually exists.  In Granite Rock, two parties began negotiating a new Collective Bargaining Agreement (“CBA”).  Later, a dispute between the parties arose, and a lawsuit and subsequent motion to compel arbitration were filed.  At the heart of these issues was the disagreement between the parties as to when the CBA had been ratified.  Although the CBA had required arbitration for all disputes “arising under” it, the question of when the CBA was ratified did not arise under the CBA because it “concerns the CBA’s very existence.”  Therefore, the question of formation was properly directed towards a court and not towards an arbitrator.

      2. Granite Rock is distinguished from Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), where the party resisting arbitration conceded that it had executed the contract containing the arbitration clause, but asserted that the entire contract was invalid due to a usurious interest provision.  The Supreme Court concluded that arbitration was required for resolution of the issue of contract validity because the arbitration clause was valid and severable from any invalid provisions.  Reversing the Florida Supreme Court’s decision, the U.S. Supreme Court held that the arbitration provision was enforceable, despite a claim that the contract containing the arbitration agreement was illegal. 

    • D. Requirements for Arbitration Agreement Enforcement, Including Choice of Law Considerations.

      1. Introduction.  For an arbitration clause or agreement to be enforced, it must meet certain internationally recognized requirements.  The New York Convention sets out the requirements for enforcement and includes basic rules such as the agreement must be in writing and involve an existing or future dispute, the agreement must be valid under the relevant jurisdiction’s law, etc.

      2. Grounds for Invalidity.  The exceptions for finding an arbitration agreement invalid are narrow.  Under the New York Convention, a court should refer disputing parties to arbitration unless it concludes that the agreement is “null and void, inoperative or incapable of being performed.”  Art. II (3).  The relevant language of the other institutions is nearly identical.  Grounds for finding an agreement null and void are limited to duress, fraud, mistake, and waiver.  These exceptions require a party to demonstrate that the obligation or remedy is fundamentally prohibited by statute, declaration, or the public policy of the forum.

        Under the severability doctrine, an arbitration clause can survive a court’s invalidation of the rest of the contract.  In 2006, the Supreme Court declared that the doctrine of severability applies to both voidable (contract exists subject to possible rescission) and void ab initio contracts.  Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

      3. Disputed Issue not Subject to Arbitration.  Still, the recognition of an arbitration agreement does not guarantee that the dispute will be subject to arbitration, because the arbitration agreement may not cover the asserted claim.

        1. For agreements under the FAA, courts apply the federal substantive law of arbitrability to determine whether an issue is subject to arbitration.  The FAA adopts a liberal policy favoring arbitration agreements, establishing that as a matter of law, any inquiry as to the scope of arbitrable matters should be decided in favor of arbitration.  A broad arbitration clause, such as “any and all claims" stemming from a contract will be arbitrated, creates a presumption in favor of arbitration.  Yet courts have held that tort claims are not subject to arbitration, though a contract claim cannot be removed from arbitration merely by framing it as a tort.  With a narrow arbitration clause, a court will permit arbitration for a claim that is prima facie addressed by the clause.  While parties may mutually decide to have matters arbitrated that otherwise fall outside the scope of the arbitration clause, the ICC, as well as some other arbitral institutions, only permit new claims at the tribunal's discretion.

        2. The interplay between arbitration agreements and choice of law is a complicated one.  It is generally accepted that, given the significant interest in avoiding parochialism, cases being arbitrated under the New York Convention do not have to look to forum choice of law rules to determine who can be bound to arbitrate.  But on the issue of what role is to be played by designated choice of law clauses, the Second Circuit Court of Appeals in several decisions has left the law in a state that has been described as one of less than perfect clarity.  FR 8 Singapore Pte. Ltd. v. Albacore Maritime Inc., 10 Civ. 1862 (S.D.N.Y. 14 Dec. 2010) ("Second Circuit precedent has been less than crystal clear") (discussing Motorola Credit Corp v. Uzan, 388 F.3d 39 (2d Cir. 2004) (applying the choice of law adopted by the parties to decide the question of whether a nonsignatory could be forced to arbitrate); and Sarhank Group v. Oracle Corp., 404 F.3d 657 (2d Cir. 2005) (discounting chosen choice of law clause and instead applying federal common law).  There may well be a distinction between whether the party seeking to enforce or avoid the chosen law is one of the signatories or, rather, for example, is a third party alleged to dominate or be the alter-ego of the signatory.

    • E. Motion to stay litigation and compel arbitration.

      1. Situations can arise in which one party will file a suit in a court at the same time the other party files an arbitral proceeding.  The party who wants arbitration should file with a United States district court a motion to compel the arbitration and stay the litigation.  See FAA § 4.  The state where the motion to compel is filed will either be the one in which the parties agreed to arbitrate their claims, or where the current litigation is pending.  A court will compel arbitration where the parties have agreed to arbitrate and the scope of the arbitration agreement covers the claim asserted.  A United States court may compel arbitration in any country that is a signatory to the New York Convention.

    • F. Joining Third Parties.

      1. A party may wish to join to an arbitration proceeding a third party who is not a signatory to the arbitration agreement.  Third parties can only be joined when a legal theory permits the tribunal to find that such third party can be deemed to have agreed to the arbitration agreement.  Theories include: (1) incorporation by reference of the agreement into a subsequent contract; (2) assumption or assignment of rights and obligations; (3) piercing the corporate veil; (4) agency; and (5) equitable estoppel, where a party is estopped from avoiding arbitration pursuant to an arbitration agreement while it benefits from such agreement by enforcing its other provisions.

      2. In some countries, including the United States, courts can subpoena third parties to attend a hearing before the arbitral tribunal or to produce documents.  See FAA § 7.

      3. A non-signatory to an arbitration agreement may compel a signatory into arbitration where either the signatory relies on the terms of such agreement to assert its claims against the non-signatory, or the signatory alleges wrongdoing by both signatory and non-signatory that is largely interrelated.  Some courts also allow non-signatories to assert the doctrine of equitable estoppel with a signatory who tries to avoid arbitration by litigating issues substantially intertwined with the arbitration agreement.

      4. A party’s ability to force another into arbitration has become easier over time.  Recently, the Supreme Court in Arthur Andersen LLP v. Wayne Carlisle, 129 S. Ct. 1896 (2009) upheld a non-signatory’s ability to compel arbitration.  The court stated: “There is no doubt that, where state law permits it, a third-party claim is ‘referable to arbitration under an agreement in writing.’”

    • G. Strategies to Attempt to Avoid Arbitration.

      1. There are several choices for a party who wishes to get out of an arbitration once it has already begun.

      2. Boycott:  On occasion a party assumes the risk of not participating in an arbitration, which will probably proceed ex parte to conclusion.  Once an award has been issued, the boycotting party may attempt to have it set aside or may challenge enforcement on jurisdictional grounds.  This is an ill-advised approach, however, because where the boycotting party has received proper notice as to the constitution of the tribunal and the arbitral hearings and deadlines, the award is usually enforceable against such party, who often will be ordered to pay costs.

      3. Object on jurisdictional grounds before the arbitral institution:  The basis for possible jurisdictional challenges include the lack of an arbitration agreement or the lack of such an agreement that covers the disputed matters, or the existence of an arbitration agreement under the rules of a different arbitral institution.  However, these objections typically fail because most arbitral rules set an extremely low threshold for proceeding.  The ICC Court, for example, only needs to conclude that it is "prima facie satisfied" that there may exist an arbitration agreement under its rules (Art. 6(2)).  In fact, if all parties to an arbitration are signatories to an arbitration agreement, it is doubtful that the arbitration will not proceed.

      4. Once objections are raised, a tribunal usually schedules an exchange of written briefs on the jurisdictional issue, followed by a preliminary hearing where the parties make their case.  An arbitral tribunal may then withdraw entirely, or it may find a middle ground by denying itself the competence to arbitrate certain claims while allowing other claims to proceed.  It is unlikely that an arbitrator will find that it has absolutely no jurisdiction.  Typically, the tribunal’s decision on jurisdiction is subject to review by a court at any time before or during the arbitration on the merits, or after an award is ordered.  Courts reviewing an arbitral decision regarding jurisdiction may grant a stay of the arbitration pending its review.

        1. A tribunal may choose to issue an interim award while determining the jurisdictional question.  Yet where the tribunal views the facts that form the basis of the jurisdictional challenge as deeply intertwined with the merits of the case, it may join the jurisdictional issue to the merits and issue no interim award.

        2. Challenges to jurisdiction can be either partial or total.  While a partial challenge raises the question of whether certain claims or counterclaims are subject to arbitration, a total challenge questions whether the agreement to arbitrate is valid at all.

      5. Seek relief from a national court:  A party wishing to object to an opponent’s request to arbitrate could seek relief from a national court, primarily in the form of a stay of arbitration.  A party could file suit in the court at the seat of arbitration or in another court that has jurisdiction, where there is a reason or benefit to applying to such court.  It is critical that parties who have received a request to arbitrate act quickly and within the requisite timeframe.  For example, under New York CPLR 7503, a party seeking to stay an arbitration must make its application within twenty days of its receipt of the request to arbitrate.  It is best for a party seeking action from a national court to do so before the arbitral tribunal has formed, as the arbitration is likely to proceed once the tribunal is formed, despite a separate court challenge.

        A party may also appear before the national courts seeking a declaration stating that the tribunal lacks jurisdiction with respect to certain claims.

        1. When applying for relief in a national court, a party must have a basis for personal jurisdiction. Because arbitrations are governed by treaty, the federal courts have original jurisdiction.  Most courts consider a forum selection clause in an arbitration agreement an adequate basis for personal jurisdiction, so a party will usually be permitted to litigate in court in the forum specified in such clause.  Furthermore, many states have adopted long-arm statutes conferring jurisdiction when there is a forum selection clause.  A party must have a separate basis for personal jurisdiction if it attempts to proceed in a court not situated in the forum specified in the forum selection clause.

      6. Continue with arbitration and challenge the final award:  A party may oppose the award, or the enforcement of the award, in the courts of the country where the arbitration took place.  However, this strategy may fail unless the party fully complies with the rules of the forum.  For example, LCIA Rule, Art. 23.2 provides that once arbitration ends, a party may be deemed to have impliedly consented to arbitration, and will be precluded from making a jurisdictional objection, if he participated in the arbitration without challenging jurisdiction.

  • III. Provisional Measures and Interim Relief In or Affecting Arbitration

    • A. Procedure.

      1. At any point before or during the arbitration process, a party may apply for an urgent, protective, or provisional measure.  As many nations and institutions recognize concurrent jurisdiction of courts and tribunals with respect to provisional measures, application can usually be made to the tribunal, a court, or another authority (such as an ICC pre-arbitral referee) unless the agreement or applicable law specifies otherwise.  Therefore, sometimes a court may intervene in the international arbitration process to obtain or enforce an interim measure.  A party who seeks interim relief will not lose its right to arbitrate if it pleads that its request for interim relief shall not be deemed a waiver of its right to arbitrate.

      2. Most major arbitral organizations authorize the use of provisional measures.  For example, Article 21(1) of the AAA Rules states:  “At the request of any party, the tribunal may take whatever interim measures it deems necessary, including injunctive relief and measures for the protection or conservation of property.”  Likewise,  Article 23(1) of the ICC Rules states:  “Unless the parties have otherwise agreed, as soon as the file has been transmitted to it, the Arbitral Tribunal may, at the request of a party, order any interim or conservatory measure it deems appropriate.”

      3. At the commencement of arbitration, parties often seek provisional remedies, such as an injunction to prevent ongoing harm by an opponent, an injunction to prevent an opponent from filing an action in another forum, an order to preserve evidence, or the attachment of assets to prevent their being squandered.

      4. Whether or not a court has authority to grant interim measures depends upon the applicable national and arbitral body’s laws and the terms of the parties’ agreement.  Some laws-- for example, the English Arbitration Act -- give priority to arbitrators and require parties to apply first to the arbitral tribunal instead of a court.

      5. Other countries, such as Italy and China, do not permit arbitrators to award interim measures.  When a court is vested with the authority to grant such measures, it acts as a supporting authority rather than a supplanting authority, and the court’s decision will be subject to later review by the tribunal.  Under most national laws, a court within the country in which the seat of arbitration is located will have jurisdiction.  Whether or not a court has authority to grant an award could also depend upon whether or not the arbitral tribunal has formed.  For example, under the ICC, once a tribunal has been constituted, the parties are only permitted to apply to a court “in appropriate circumstances.”  Under the LCIA, application can only be made “in exceptional cases.”

        1. While the FAA does not specifically authorize courts to grant injunctive or other preliminary relief, most courts have held that courts do have such authority in appropriate cases.  Only the Eighth Circuit has held that courts lack authority to grant such relief unless the parties have specifically consented to permit the court to do so.

        2. The circuit courts are divided as to whether the New York Convention permits courts to grant such preliminary relief.  The Third and Fourth Circuits have held that the Convention precludes district courts from granting provisional remedies where the parties have agreed to arbitrate.

      6. One frequently sought-after interim measure is a stay of litigation.  When the arbitration is governed by the FAA, courts must stay proceedings upon a party's request where the issues involved are subject to arbitration or related to actions pending the outcome of an arbitration.  The court must then issue an order to compel arbitration of such issues.  Where a party is not a signatory to the agreement, the court exercises discretion as to whether a stay should be issued.  Additionally, a stay may be issued where the matter in dispute may render a litigation redundant or moot.

      7. In deciding whether to apply to a court or a tribunal for an interim award, a party should be advised of the impact the decision has on confidentiality.  The desire to keep issues confidential is often one of the reasons parties are drawn to arbitration.  However, once an application is made to a court, detailed factual information may need to be disclosed in order to support the request.  While it is possible for a court to seal the record and close the hearings, a court may require a very strong showing of need before it agrees to do so.

  • IV. Enforcement of Interim Awards

    • A. General Application and Limitation

      1. Interim awards granted by a tribunal are not as easily enforced as final awards.  Under the FAA and the New York Convention, an award must be final to allow judicial review and enforcement.  Arbitral tribunals lack the coercive powers that courts of law possess.  Yet an interim measure is binding on the parties, and it would be short-sighted for a party to ignore an interim award granted by the tribunal ultimately deciding the merits of the dispute.

      2. There are limited instances where a court may enforce an arbitrator’s interim award.  First, an award that is confined to a discrete, time-sensitive claim may be confirmed by a court despite other claims continuing in arbitration.  Additionally, interim equitable awards, such as an award for preliminary injunctive relief, may be enforced by a court where doing so is necessary to make a final arbitral award meaningful.  For example, an arbitrator’s interim equitable award of freezing assets could be necessary to assure that any final award granted would be meaningful.

      3. The disinclination of courts to interfere with an arbitration, even a final one and particularly an ongoing one, is exemplified by the Fifth Circuit's decision in Positive Software Solutions, Inc. v. New Century Mortgage Corp., et al., No. 09-10355 (5th Cir. 9/13/10), which is discussed in our OneWorld blog posting of 9/20/10. 

  • V. Enforcement and Recognition of Arbitral Awards