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Australia's arbitration hesitation

Australia's arbitration hesitation

International arbitration has effectively established a monopoly over the binding resolution of cross-border disputes. Australia now faces the challenges of getting on board and establishing…

International arbitration has effectively established a monopoly over the binding resolution of cross-border disputes. Australia now faces the challenges of getting on board and establishing itself as an arbitration hot spot, Zoe Lyon writes.

The system is supposed to produce final outcomes and people enter into it knowing that. If you wanted to have the endless appeal rights ... you'd go to local court litigation"

With the world now more interconnected than it has ever been, international transactions - and, inevitably, international disputes - have become part and parcel of business for most large organisations.

But unlike domestic disputes which, at least in Australia, can be played out and resolved in a stable, respected, relatively efficient and familiar court system, international disputes come with a whole new set of problems.

Issues often facing parties to international disputes can include differences in their countries' legal systems, court systems, business styles, culture and language, not to mention the fact that assets at the centre of a dispute may be located in a different jurisdiction entirely.

With these forces conspiring, and court systems rendered virtually useless for resolving many cross-border disputes, the establishment of an alternative was inevitable. Enter: international commercial arbitration.

The only game in town

Doug Jones, a partner at Clayton Utz specialising in international commercial arbitration who is also president of the Australian Centre for International Commercial Arbitration (ACICA), says international arbitration is "the only game in town" when it comes to resolving cross-border disputes.

"International arbitration is really the only effective way of resolution of cross-border disputes - court proceedings don't offer anything like the advantages that international arbitration offers. It is so effective that it really represents a monopoly as a method of binding dispute resolution internationally," he says.

There's no doubt the use of international arbitration is on the rise. In his recent article International Dispute Resolution in the Global Financial Crisis, Jones cites statistics showing the growing case loads of the leading international arbitration bodies worldwide over the last decade. Since 2000, the US's International Centre for Dispute Resolution (ICDR) has seen a 38 per cent increase in cases files, the UK's London Court of International Arbitration (LCIA) an 81 per cent increase, China's Hong Kong International Arbitration Centre (HKIAC) a 100 per cent increase, and the International Chamber of Commerce (ICC) a 22 per cent increase.

This trend has been significantly heightened by the economic crisis, with the ICDR, the LCIA, the HKIAC and the ICC seeing case load increases of 13 per cent, 15 per cent, 35 per cent and 11 per cent respectively between 2007 and 2008.

Ticking the boxes

Jones says that among the perceived benefits of international arbitration for resolving cross-border disputes, the enforceability of arbitral awards is the most significant. His view is supported by findings from a 2008 survey sponsored by PricewaterhouseCoopers in which 24 per cent of respondents cited enforceability as international arbitration's greatest advantage.

The strength of its enforceability springs from the comprehensive worldwide uptake of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention), which requires signatory nations to recognise and enforce arbitral awards.

International arbitrator and former president of both ACICA and the Institute of Arbitrators and Mediators Australia (IAMA), Toni de Fina, describes the NY Convention as "the steel chain" that holds together "the whole fabric of international dispute resolution". With an impressive 145 signatories, it now covers virtually every major trading nation, including Australia.

In contrast, it can prove excruciatingly difficult for a party, after winning a dispute in a court, to get that court decision enforced unless there is reciprocal agreement between the relevant countries. In the case of Australia, such reciprocal agreements are relatively few and far between.

But even before the issue of enforcement comes into play, the process of arbitration itself can offer some distinct advantages over litigation in an international setting.

Mallesons Stephen Jaques partner and international arbitration specialist Max Bonnell explains that there are a host of reasons a party would not want to proceed through a local court system.

"For example, some courts in developing countries have a reputation, rightly or wrongly, for being corrupt, and there are courts in developing countries where it is very hard for foreigners to win," he says. "Then there are other courts, like the courts of India, which are generally very fair and produce good judgements, but are incredibly slow - it takes ten years to get a case to hearing in India."

Cost issues can also be a factor, he says, with some court systems - such as New York - being notoriously expensive, and unwilling to make costs orders. Language boundaries and unfamiliarity with different court processes can also be problematic, and could deter, for example, an Australian party pursuing an action through the courts of France.

Arbitration, on the other hand, has the benefit of neutrality, particularly when it comes to the selection of the arbitrators. Though selection processes vary, typically one arbitrator is chosen by each party to the dispute, while the third arbitrator - who is from a neutral country - is selected through agreement. In addition, arbitrations tend to be heard in a neutral venue, with London, Paris, Geneva, New York and, increasingly, Hong Kong and Singapore, now recognised as arbitration hot spots.

Other perceived benefits of arbitration include the privacy of proceedings and the finality of the outcome - there being little to no avenue to appeal an arbitral award. This can be a double-edged sword, but both Jones and Bonnell believe the benefits outweigh the costs. "It is said by many to be an advantage in the sense that there is finality, but it certainly means you're stuck with the outcome," Jones says. "However, many say finality is as valuable a characteristic as enforceability."

Bonnell adds: "Ultimately I think it's a benefit. The system is supposed to produce final outcomes and people enter into it knowing that. If you wanted to have the endless appeal rights ... you'd go to local court litigation."

Australia - life in the slow lane

So far, international arbitration has attracted only a small, niche field of specialists in Australia, and we have yet to establish ourselves as a specialist centre.

Bonnell believes the Australian profession's hesitancy to get on board with international arbitration is at least partially a product of its conservatism.

"Australian lawyers have been traditionally very suspicious of international law and much more comfortable with Australian courtroom processes, which they understand," he says. "Australian lawyers are very conservative and we've caught on to this late. The system of international arbitration was embraced in Europe and America long before it was here, and of course their economies are much more intertwined because of their proximity. So they have a number of years more experience at this kind of work than we tend to have in Australia."

De Fina agrees, believing the profession's hesitancy stems from Australia's narrow legal training, and a reluctance to consider the benefits of processes and practices outside our own court system. "Unfortunately, we teach our undergraduates that there is only one system of law - and that's the common law. And if, by some chance, there happens to be another system of law, the common law is better," he says. "So I think it's a function of our legal training, and I suspect it's a function of our rigidity - the non-expansive, non-entrepreneurial thinking of our lawyers. We're an island and we treat ourselves as an island."

Where this stands out, Bonnell says, is in the fact that Australian practitioners still have a tendency to stick to traditional courtroom practices when it comes to participating in international arbitrations.

"I think where Australian practitioners are slightly out of step with the rest of the world is that most Australian firms will still brief barristers to argue cases, and that's generally not how it's handled by the rest of the world," he says.

"I think it's partly because we just get into the habit of briefing disputes out because it's what we do in litigation, and I think that's a product of our limited exposure to the international arbitration system. But if I have an arbitration against an international firm like Herbert Smith or White & Case, I would expect to find a Herbert Smith or White & Case partner doing the advocacy on the other side."

Bonnell believes, however, that the situation is improving. "I think there's now a better understanding of international arbitration as a well-developed area of law, and as a result, I think that people are becoming a lot more accepting than they were of using the systems to provide remedies," he says.

Making our mark

Although Australia is yet to make its mark on the international arbitration map, there is a concerted drive under way to ensure it does so, explains Jones.

"It's a pretty specialised area of dispute resolution, and we in Australia are aspiring to develop a centre of excellence amongst legal practitioners who will stand out as experts able to hold their own anywhere in the world in this area," he says. "As a consequence, there are programs under way where those of us who practise in the area are trying to build a critical mass, and the ability to do this."

One of the key bodies behind this push is ACICA, which was launched in 1985 for the purpose of developing international arbitration in the country and promoting Australia - in particular Sydney - as an arbitration centre.

According to Jones, the organisation aims to establish Sydney as an arbitration "seat" - a jurisdiction whose procedural rules govern arbitrations and generally where those arbitrations are held. He believes that establishing Australia as a seat - particularly given the increasing number of disputes within the rapidly developing Asia-Pacific Region - will drive the development of the specialisation within the Australian profession.

"Because, the more arbitrations [we have] seated here, the more work there is. At the moment, without a large number of Australian-seated arbitrations, those of us who practise are working offshore, because we go to represent parties, or sit as arbitrators, elsewhere. That practice is clearly more limited than if you do it at home," he says.

Also behind this drive is the Australian Government, with Attorney-General Robert McClelland late last year announcing a review of the International Arbitration Act 1974 (Cth) (IAA Act).

Announcing the review, McClelland said the aim was to "ensure that the act provides Australia with the best possible framework for international arbitration" and that the Government was "committed to developing Australia as a regional hub for international commercial dispute resolution".

McClelland released a discussion paper setting out a number of suggested reforms, primarily aimed at updating the IAA Act to incorporate international best practices. Submissions on the paper were accepted up until January, and the outcome of the review is eagerly awaited by practitioners such as Jones, who believes that the development of a clear legal framework will be a "key issue" in realising ACICA's vision of establishing Sydney as an international arbitration hub.

The future

The jury is still out as to whether or not Australia can establish a firm presence in the international arbitration world.

De Fina is sceptical, citing our geographical isolation as the biggest hurdle. "They're not going to attract international arbitrations in Australia. Australia is too far away from anywhere - who's going to come here?" he queries. "It won't work, it can't work - I tried when I was the president of ACICA for 18 years to do something, but I realised the futility of it all. But what we can do is make our practitioners more familiar with [international arbitration]."

While acknowledging this hurdle, Jones is somewhat more optimistic. "The tyranny of distance is a significant issue. This has undoubtedly delayed the development of Australian centres for international arbitration," he concedes in his article. "However, all of the potential venues for international arbitration in Australia are attractive both geographically, and from a logistic and cost perspective. Furthermore, Australia is a stable democracy with a well established common law system whose predictability and longevity is not open to question."

In fact Jones believes Sydney has what it takes to become internationally recognised as a "safe seat" - a place with an effective legal framework supporting international arbitration, where there are a critical mass of practitioners who can provide arbitration services, where courts support the process and where there are no restrictions on international practitioners who want to come and represent their clients.

"We are very much in that category," he says.

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