The Arbitration Clause; Applicable Law in the US

By Aaron N. Wise, Attorney at Law © 2009

- General Considerations. Although arbitration has its pros and cons, it is usually the best solution for transactions with the USA and with U.S. parties. In the USA, the most well known and used arbitral institution is the American Arbitration Association (AAAA@) with its headquarters in New York City. It is capable of handling an arbitration anywhere within the USA and, additionally, anywhere in the world. The AAA=s International Arbitration Rules and its Commercial Arbitration Rules are frequently used in commercial and international commercial disputes.

To repeat, a properly drafted arbitration clause will usually be the best solution for a foreign party. From the offensive viewpoint (claims of the foreign side against the U.S. party) a U.S. arbitration will normally be quicker and less costly than a lawsuit in a U.S. court. That also applies for smaller claim amounts. In a U.S. arbitration, the permissible scope of Adiscovery@ (compared with pre-trial discovery in a U.S. court) is reduced. From a defensive standpoint (the U.S. side has claims/counterclaims against the foreign party), arbitrators are often inclined to award lesser amounts of monetary damages than a U.S. court, particularly if a jury is deciding.

Most U.S. parties will not agree to arbitrate disputes and claims in a foreign country or anywhere other than the USA; and will not agree to some “foreign” law or any law other than the law of some U.S. state being applicable to disputes and claims. They will as a rule agree to arbitrate disputes in some US city according to the AAA=s International or Commercial Arbitration Rules. Moreover, clauses stipulating arbitration in a foreign country (not the USA) but stating that the law of some U.S. state will apply to the parties= relationship will usually not be good for the foreign party. It will usually be expensive, difficult and problematic to plead and prove American law before arbitrator(s) outside of the USA. A commercial arbitral award rendered outside the USA can normally be enforced in the USA if the foreign party is from a country that adheres to an international arbitration convention to which the USA also is bound. Nevertheless, experience has shown that the enforcement procedure is rather complicated and costly as compared to the enforcement in the USA of an arbitral award rendered within the USA. The U.S. city in which the arbitration proceedings will occur does not have to be the city where the U.S. side has its headquarters or a place of business. In fact, from the foreign party=s standpoint, that should be avoided. Where possible, the arbitration clause should provide for arbitration in a U.S. city not too close to the American side=s location (e.g., not where it has a place of business), and but one that is reasonable convenient for the foreign party. Quite often, the parties in their contract stipulate New York City as the place of arbitration and provide for the application of New York State law to their contract (even though New York State may not have a material connection with the transactions).

- Variations and special points regarding arbitration. The parties may provide in their contract:

? that if the foreign side (as supplier, licensor etc.) is the one initiating arbitration, it will be under the AAA=s International Arbitration Rules in a particular, named U.S. city reasonably distant from the U.S. party’s place of business; but if the U.S. side initiates arbitration, it must be take place in a named city in the foreign party’s country under the same AAA International Arbitration Rules or some other agreed arbitration rules. This variation permits the foreign party to attack in the USA where the American party is located---a distinct advantage; but allows it to defend in its home country---another important advantage. The U.S. party, of course, more often than not will not accept this formula, but it might well be worth a try.

? that only the foreign party has the right, at its sole election, either to arbitrate disputes and claims pursuant to the arbitration provisions in the contract, or to sue the U.S. side in a U.S. court. Under the laws of many U.S. states, such a provision is legally enforceable. It provides flexibility to the foreign party.

Obviously, there are many other possible variations too numerous to mention here.v

Typically, U.S. parties will, in contract negotiations, initially refuse to have any court or arbitral tribunal other than one located very close to the U.S. side=s place of business decide disputes and claims, and will insist that the laws of that jurisdiction (U.S. State) apply to the contract and all disputes/claims. If, however, the foreign party is firm in negotiations, insisting on arbitration and applicable law clauses of the types noted above, it might end up with them.

- Other important considerations regarding arbitration clauses

? How many arbitrators should decide the disputes/claims, one or three?

? How should the arbitrators= fees and other costs of arbitration be divided by the parties?

? Who should the arbitrator(s) be and how should they be chosen?

The advantages of having only one arbitrator include: lower costs (one pays the arbitrators); and it is normally easier to get things done, as compared with three arbitrators who may not be readily available for hearings, decision making and other procedures. The American Arbitration Association (“AAA”) employs a “list procedure” to select the arbitrator(s) if the parties have not agreed on the arbitrator(s) or another method of selecting them. The AAA arbitrator list normally contains qualified persons, and the list procedure itself works reasonably well in most cases. As stated above, the AAA has arbitrators available in a considerable number of countries.

The following contractual provisions may, in a particular case, be beneficial to the foreign party:

- that claims based on the violation of the U.S. antitrust laws are not within the competence of the arbitrator(s) under the arbitration clause. The advantage is that the U.S. party, who would normally be the one making an antitrust law-based damage claim, would have to start a separate lawsuit against the foreign party in a US court. Often, such claims are not strong ones (and are raised primarily to Afrighten@ or “intimidate” the foreign party), so that the U.S. side might well be reluctant to spend the time and money to initiate a separate lawsuit.

- that each party can, despite the arbitration clause, apply to a court for interlocutory relief (e.g., a temporary restraining order and/or preliminary injunction).

- that the arbitrator(s) can, upon application of either party, require the other party to deposit security (e.g., a bond, bank guarantee) to satisfy any eventual monetary award in favor of the other party.

? that the prevailing party in the arbitration will be entitled to recover from the other party its own legal fees and costs connected with the matter.

? that if the U.S. side wishes to raise a product liability claim against the foreign party, it must do so in the arbitration. For example, a person in the USA is injured or dies allegedly through the use of a product or component produced or sold by the foreign party, sues the, the foreign party=s U.S. distributor, agent, licensee or the like (the “U.S. contract partner”) in a US court---but not the foreign party itself. The U.S. contract partner would like to bring the foreign party into the case, claiming indemnification of any damages awarded against it and its costs. If the contractual arbitration provisions are properly drafted, it may be possible to avoid that. In other words, they might require the U.S. side to initiate arbitration under the arbitration clause to pursue its product liability claims against the foreign party.