When and Why Arbitration Matters
WHEN AND WHY ARBITRATION MATTERS*
There is little use in going to law with the devil while the court is held in hell.
Humphrey O’Sullivan1
A. Introduction
More than one thoughtful business manager has contemplated the prospect of litigation abroad in terms analogous to those used by the nineteenth-century diarist quoted above. When an international venture goes awry, the dramatically disagreeable consequences can often include the “home-town justice” of the other side’s national courts: unfamiliar procedures, perhaps a foreign language, and in some countries a xenophobic or even corrupt judge.
The reality of litigation bias against foreigners may often be less significant than the perception that such prejudice exists. A recent study has found evidence that in federal civil actions in the United States, foreigners actually fare better than domestic parties.2 One explanation for this counter-intuitive finding lies in a fear of litigation bias that leads foreign litigants to settle rather than continue to final judgment, unless they have particularly strong cases.
To reduce the prospect of bias and uncertainty in litigation, many international contracts include a forum selection mechanism, which typically falls into one of two categories: (i) a jurisdiction clause that grants exclusive adjudicatory competence to designated courts; or (ii) an arbitration clause that provides for disputes arising out of the contract to be settled under the rules of a relatively neutral arbitral institution. The costs and benefits of each of these alternatives do not yield to facile analysis. Nevertheless it is possible to identify several contexts in which arbitration will outperform court litigation, both in reducing the risk of biased foreign proceedings and in maximizing the international currency of an honest decision.
B. Litigation Alternatives
The text of the law governing an international sale, lease, or loan agreement will often be less important than the context of its enforcement. Who interprets an international agreement will frequently be more significant than what the applicable law says about the agreement’s construction. Contracts do not enforce themselves automatically, but need the intervention of flesh-and-blood adjudicators. And in the international arena there exists no neutral commercial court of compulsory jurisdiction.3
In a domestic context, of course, failure to consider forum selection may not make as much of a difference. If a Boston seller must sue a Georgia buyer in Atlanta, the dispute will take place within a relatively homogeneous linguistic and procedural context. Proceedings can usually be expected to unfold in some variant of the English language according to the Federal Rules of Civil Procedure.
If the buyer is located not in Atlanta, however, but in Athens, Algiers or Aix-en-Provence, the court action may proceed not in the language of Shakespeare, but in the tongue of Demosthenes, Mohammed or Molière. Even if the linguistic hurdle can be overcome, local counsel must usually be engaged to advise on what to one side will be an unfamiliar code of civil procedure. In some countries the questionable integrity of the judicial system may make judicial proceedings resemble auctions more than trials, with judgment going to the highest bidder.
Under the rules of an arbitral institution such as the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA), parties to an international contract can level the playing field. An arbitral tribunal can be convened in a mutually accessible country, chaired by someone of a nationality different from the parties, with proceedings in a common language, and according to procedural rules that give neither side an unfair advantage. The New York Arbitration Convention provides for the agreement and the resulting award to be enforced in over one hundred countries.
As an alternative to arbitration an international contract might include a jurisdiction clause (sometimes called a prorogation agreement4) by which the parties submit to the jurisdiction of tribunals within a particular city, state, province or canton. For example, a contract between an American distributor and a German manufacturer might provide for any future disputes to be resolved by the High Court of London. Multinationals with superior bargaining power might even be able to impose a jurisdiction clause that designates their home courts.
The following discussion addresses some of the advantages and drawbacks of arbitration. A fuller treatment of the differences between arbitration clauses and court-selection agreements can be found in the material “Bridging the Gap in Forum Selection” and “The Hague Choice of Court Convention” (at Part IV, Section E, Chapters 2 and 1, respectively).
C. Court Selection Clauses in the United States
From an American perspective shopping for a court remains problematic, even if both parties originally were in agreement about the choice. Jurisdiction clauses can on occasion backfire to raise the risk of a judicial hijacking in which the dispute ends up before the adversary’s home court. Three factors account for this perhaps surprising state of affairs: the failure of the United States to conclude any jurisdiction and judgments treaty, the absence of a federal court selection statute, and the possibility that a designated court may refuse to hear a case due to lack of subject matter jurisdiction or on forum non conveniens grounds.
No treaties
The United States is not a party to a single treaty providing for enforcement of foreign judgments. Even Great Britain has refused to ratify a judgments treaty with the United States from fear of civil juries, punitive damages, strict liability and other quaint aspects of the American legal system. While courts in some jurisdictions will generally enforce foreign judgments on the basis of internal law (giving the judgment res judicata effect as a matter of comity rather than international obligation), not all countries are so generous.
No statute
No American jurisdiction—with the exception of New York State in limited cases—will treat court selection clauses as dispositive.5 No federal statute enforces choice-of-court clauses in the way that the Federal Arbitration Act (FAA) enforces arbitration agreements.
In practice, of course, courts do tend to recognize jurisdiction clauses if they will permit judges to reduce their workloads by sending cases elsewhere. However, respect for the clause remains a matter of judicial discretion. Court selection agreements will constitute only one factor to be weighed among many others in the balance of convenience and fairness.
Several Supreme Court decisions are often cited for the proposition that court selection clauses will be enforced.6 Yet what these cases actually say is that jurisdiction agreements will be respected if “reasonable” by reference to a multiplicity of factors that vary from court to court. One lower court decision set forth nine factors relevant to the reasonableness of a jurisdiction clause, emphasizing “the totality of the circumstances measured in the interests of justice.”7 In addition to private interests (for example the location of the parties and witnesses), courts have also stressed what they refer to as the public interests of “systemic integrity and fairness.”8
The situation is even more complex when one looks at state law.9 Several states still refuse to enforce court selection clauses, either in general, or with respect to particular types of contracts such as franchise agreements.10
Even if state law does accept in theory the validity of jurisdiction clauses, courts in practice may give the clauses a restrictive interpretation that vitiates their effect. Some court selection clauses have been construed as non-exclusive, therefore inviting competing actions in different fora.11 Other clauses have been read to exclude actions based on extra-contractual wrongs such as deceit and unfair business practices. In one case, the trial judge was required to determine the “principal focus” of the plaintiff’s claims (in order to avoid parallel actions for contractual and non-contractual actions), with the consequence that to the date of this writing the case has not been sent to the contractually selected forum.12
No conclusive effect
Finally, subject matter jurisdictional limits and judicial discretion to decline to hear a case may render ineffective an otherwise valid jurisdiction clause. Unless a case raises a question of federal law, one foreigner normally may not sue another in federal court. This means that when a foreign company is on both sides of the litigation a federal court designated by a jurisdiction clause may be required to dismiss the case, regardless of how eager the litigants are to thrust jurisdiction on the designated court.
A court with jurisdiction may also decline to hear a case on forum non conveniens grounds because of the location of witnesses and documents, or the drain on public resources. Unlike the practice in eighteenth-century England, judges no longer get paid a special supplement for each case decided. Only New York has done away with forum non conveniens in court selection cases, and only within the confines of a statute covering certain actions arising out of transactions of $1 million or more.13 While one overworked judge may enforce a jurisdiction clause that sends the case elsewhere, thereby clearing a crowded docket, there is no guarantee that an equally overworked judge in the contractually selected jurisdiction will not decline to hear the dispute on the basis that a more convenient forum may be found elsewhere.