International Arbitration-What’s in it for Your Franchise?
International Arbitration—What’s in it for Your Franchise?
In international arbitration, the parties have more control than in alternative systems and better ability to enforce their awards.
By Craig Tractenberg
Increasing globalization of the world economy and expansion of international trade drives franchise brands to seek new frontiers. As the growth of international franchising increases, franchisors must remain competitive with offers of franchise arrangements that are user friendly. International contract provisions that specify dispute resolution most often require arbitration of these disputes before a recognized and supervised arbitration provider.
Experienced international parties recognize the benefit of controlling time and costs when dealing with the complexity of cross-border transactions and rely on the predictability of established arbitration providers in resolving disputes. The franchise industry can benefit from the lessons learned by foreign governments that seek to increase foreign investment within their borders. The lesson is simple: if you want foreign investment, you need to provide a fair forum for resolving disputes. The same is true for franchisors seeking foreign investment within their franchise systems.
Why International Arbitration is Helpful to Sell International Transactions
A fundamental principle of international arbitration is party autonomy, and compares favorably with the alternative of granting a country’s court system the power and authority to control the pace and the intensity of the dispute resolution. In international arbitration, although the parties may not always agree on the procedural and substantive aspects, the parties have more control than in alternative systems and better ability to enforce their awards.
Party autonomy is demonstrated in the drafting stage, where the parties can agree on the place of arbitration, the language of the proceedings, the procedure to be followed, the depth, intensity and limits of discovery, the length of the arbitration (from beginning to end) and the applicable law. When a dispute arises, some autonomy is shifted in part to the Tribunal, but generally the Tribunal can only decide what the parties have not already decided for themselves. During this period, the Tribunal requests the parties to agree on the scope of the issues to be decided, often referred to as the “Terms of Reference” and the dispute resolution begins with the Tribunal’s involvement. At the end of the process, the autonomy is returned to the parties with a new legal framework in the form of an arbitral award, in effect, a resolution that the parties could not negotiate for themselves.
The procedure of international arbitration promotes conservation of time and energy.
When foreign investors are comparing alternative investments, they may ask themselves the same question that the franchisor asks, “Why should I trust the outcome of any dispute to the tender mercies of a country’s legal system when I can shape and substantially control the manner in which the dispute is resolved?” The overwhelming disposition of this question favors international arbitration with a recognized arbitration administrator to establish a qualified Tribunal.
The autonomy allows the parties to select a neutral forum and to avoid a “home court advantage.” The parties can agree on the language of the arbitration, typically English, even if the arbitration occurs in a non-English speaking country. The arbitrators themselves need to certify that they are independent from the parties as no “party appointed, party advocate” arbitrators are tolerated in international arbitration. The entire process is intended to be as neutral as possible and expedited as compared to most court proceedings. Even in the most complicated cases, international arbitration can be concluded within nine months from filing the request to the rendering of an award, with interim relief available.
Increasing Popularity of International Arbitration
The desirability of international arbitration is demonstrated by its growth with the growth of international trade. In the first 50 years of its existence, from 1923 to 1973, the International Chamber of Commerce’s International Court of Arbitration received roughly 3,000 requests for arbitration. From 1973-2003, nearly 20,000 cases were filed with the ICC. From 2003-2010 the filings have increased dramatically, with a steep rise recently. Compared to one year earlier, the 2009 requests for arbitrations filed in arbitration institutions were up 23 percent before the ICC, 19 percent before The American Arbitration Association, 20 percent in China before CIETAC, 61 percent before the Singapore International Arbitration Centre and 27 percent before the London Court of International Arbitration.
Confidence in the Enforceability of International Arbitration Awards
The principle reason for confidence in international arbitration awards is because the award is more readily enforceable around the world than a judgment by a court. The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) is part of the law in 134 signatory countries. These countries include Japan, the United Kingdom, France, the United States, Germany, Canada, China, the Russian Federation, Mexico, Brazil and Argentina, as well as all other industrialized countries. The New York Convention provides only limited grounds for challenge of an award, although some countries may impose their own restrictions on the enforceability of awards.
Technical Advantages of International Arbitration
The New York Convention enhances the enforceability of arbitration awards, rendering arbitration more effective than court judgments. Unlike courts which have their own established procedure regarding jurisdiction, competence, conduct of actions, proof of facts, and manner of proceeding, the parties control the arbitration and have the freedom to limit or enhance discovery. Parties are able to maintain confidentiality and privacy in arbitration proceedings. The parties can adjust their disputes and deal with trade secrets outside the prying eyes of competitors. Although franchise disclosure laws may require disclosure of the initiation of proceedings and outcome, no one will be able to access the filings and confidential information within the arbitration. The likelihood of media intrusion is certainly much more remote than in litigation.
The procedure of international arbitration promotes conservation of time and energy. The positions of the parties are expressed in comprehensive legal briefs, called “Memorials” and are accompanied by witness statements under oath and exhibits.
Litigators in the United States might be disappointed to learn that like the rest of the world, very little discovery is generally permitted absent express authority in the arbitration clause. Minor document exchanges are permitted generally, but depositions generally are not. The Memorials are exchanged in advance of the hearing and read by the Tribunal, limiting the number of days of hearing.
Even the hearings are conducted in an expedited manner. The witnesses are invited to introduce themselves and verify their previously submitted witness statement. After a few minutes of introduction, either the Tribunal or the opposing party asks questions and the witness completes the testimony in an hour or two. The newest procedure is panel examination (colloquially referred to as “hot tubbing”), where opposing experts, for example, are requested to sit side by side and testify simultaneously. The Tribunal asks the questions to determine where they differ and why, and then the parties are invited to ask each of the experts questions. This procedure seems less adversarial and more focused on obtaining all of the information necessary to reach the right result. Trial preparation and counsel demeanor can be very different in this setting.
Practical Considerations for Deciding International Arbitration
International arbitration can be expensive due to travel and the cost of quality arbitrators. However, the expense is recoverable in the award if you prevail, and is more likely to be awarded by an arbitration Tribunal than by a court, and discovery is generally more limited, so executive time is preserved. Unlike the United States, the presumption is that counsel fees are awarded to the prevailing party. You may wish to substitute or augment your regular counsel with counsel experienced in international arbitration as the dynamics and procedures can be different. The very limited grounds for overturning an arbitration award means that you only have a single opportunity to make a first and lasting impression. On the other hand, you eliminate the risk of corruption and runaway jury outcomes by choosing one of the established arbitration organizations previously identified, although there are several others. It is helpful to select arbitrators from countries familiar with your legal system and perhaps even your brand.
In addition to the best practices in preparing franchise agreements, common sense should apply particularly to international agreements. The temptation to have a uniquely international and independent decision should not ignore the practical needs of the parties. Selecting Sweden for your arbitration to be conducted in English when the witnesses mostly speak Spanish is unnecessarily expensive. Talk with international arbitration counsel if you are drafting your clause so that you can intelligently select the procedural rules to apply. The ICC will apply ICC rules, but may augment the rules with the International Bar Association Arbitration Rules, or the rules developed by the United Nations Commission on International Trade Law, UNCITRAL. These expressly reserve the availability of provisional relief and interim measures being awarded by the Tribunal.
Avoid pre-qualifying arbitrators, as it will be more expensive and time consuming to find a three-person Tribunal. Specify whether costs and fees must be awarded to the prevailing party. Provide for confidentiality in the proceedings and whether the award will be reasoned or just a summary decision. Some countries may be overly formalistic about the parties which may participate or be bound by the award, so customize the arbitration clause to your transaction where you believe multiple parties may need their rights decided and their agreements enforced.
Franchisors offering the option of international arbitration will find their international deal making enhanced. Where the negotiation is particularly contentious, knowing that any dispute will be resolved fairly, impartially and efficiently may just be the edge necessary to get the deal done.
Craig R. Tractenberg is a partner and leader of the Franchise and Distribution Practice at the law firm Nixon Peabody. He can be reached at 212-940-3722 or email@example.com.