Settling international disputes: dispute settlement is hard enough when both parties are located in the same city. When it comes to solving international disagreements, be prepared for challenges. (Global View).

An increasing number of companies prefer to settle disputes out of court. The parties involved have two choices: mediation or arbitration. Both methods have advantages and disadvantages. To determine the appropriate solution for a given situation, you have to understand how they differ. The Quebec National and International Commercial Arbitration Centre (CACNIQ) offers some insight into mediation and arbitration.

Both approaches are confidential and extrajudicial, two major advantages for many companies. Mediation seeks to provide a voluntary framework for dispute settlement. The parties involved choose a third party who acts as facilitator. The mediator has no power to decide the outcome. It's the parties themselves that determine the results by mutual agreement. If mediation fails, the parties are free to withdraw from the process, launch legal proceedings at any time or turn to one or more arbitrators.

Arbitration, on the other hand, is a private process, the outcome of which is binding. More formal than mediation, it is an extrajudicial approach to dispute settlement in which the parties choose a neutral third party, who can be a single arbitrator or three, to resolve the dispute. The arbitrator follows a procedure that has defined guidelines and resolves the dispute by applying the rule of law chosen by the parties. At the request of the parties, the arbitrator(s) can judge on equity or on law. In arbitration, the advantages of legal action are combined with a level of flexibility specified by the parties. Its main advantages are neutrality, flexibility, the special knowledge of the arbitrators, international recognition of rulings and a shorter settlement time.

In arbitration, the parties involved are on equal footing in five essential areas of the procedure: the place of arbitration, the language used, the applicable rules and laws, the nationality of the arbitrators and legal representation. This allows for a neutral procedure that favours neither party. Unlike the regular legal system, which does not allow a choice of judge, arbitration enables parties to designate the person or persons of their choice to be arbitrator(s), provided they are independent. This means that disputes can be settled by specialists in the field involved.

Last spring, during a conference at the Montreal World Trade Centre entitled "Arbitration, a solution for international disputes," Danielle Letourneau, President and CEO of CACNIQ, noted that arbitral awards are more likely to receive international recognition than national court decisions. "Some 125 countries, including Canada, have acceded to the 1958 United Nations Convention on the recognition of foreign arbitral awards," she pointed out, referring to the so-called New York Convention that facilitates the enforcement of arbitral awards in all contracting states. The Convention essentially requires the courts of each contracting state to recognize written arbitral awards, and, in the presence of a contractual clause, refer the parties to arbitration and enforce foreign arbitral awards.

In the case of institutional arbitration, the time limit for appointing the arbitrator, transmission of the response of the notice to arbitrate, holding preparatory meetings, the hearing and the ruling are closely tracked by the institution in charge of arbitration, in compliance with its regulations. Although a dispute may be settled in just two months, it is more realistic and common to see international disputes settled by arbitration in a year. The related costs, speed of settlement, confidentiality of results, maintenance of ongoing business relations, procedural and legal guarantees and likelihood of recovery are all factors in favour of arbitration, according to Letourneau.

Legal risks of international transactions

In international transactions involving parties of differing nationalities, the parties often don't share the same language, culture or legal traditions. The rules of procedure and law, and thus of the interpretation of contracts, differ. "These are legal risks in themselves. However, the biggest risk is having to settle a dispute with a foreign partner in a foreign court," claims Letourneau. The parties may have diverging views of how to arrive at a fair and reasonable settlement. Needless to say, the level of uncertainty is greater in international than domestic business dealings.

Frequently, during contract negotiations, a firm that doesn't have negotiating power on its side finds itself losing the choice of legal jurisdiction to the other party. "Except for firms with the clout of Bombardier, few Quebec companies are able to integrate our law and local courts in their contracts," adds Letourneau.

It is essential to include definitions, technical specifications, respective responsibilities, nondisclosure clauses, financial aspects and court jurisdiction in case of a dispute (given the reluctance of parties to bring their disputes before national courts) when negotiating a contract, whether with a foreign or Canadian company. Disputes, whether they generate gains or losses, are inevitably an element of a company's business.

If specific clauses governing conflict resolution are not included in contracts, complex international conflict resolution legislation applies, and legal assistance is needed to determine which law and court are applicable. "Normally, international contracts specify which country has jurisdiction," Letourneau says. Increasingly, these contracts provide a clause that eliminates recourse to traditional courts in favour of arbitration or mediation.

It is commonly thought that parties in a dispute begin with mediation and turn to arbitration only after the first method fails. "In fact, that isn't the standard approach," says Letourneau. Some companies have no faith in mediation, and in any case, every situation is unique. A company's dispute settlement policy can include as many details as it wishes, even for cases that go to arbitration. Some companies provide a specific timeframe for mediation and if the dispute is not settled by then, it goes to arbitration. The clause governing dispute settlement may, in some cases, turn out to be very complex.

Letourneau cites the example of franchise contracts. Although disputes may occur between a franchisee and franchisor located in different countries, business relations must continue after the dispute is settled, and both parties have to be able to maintain good relations in the future. In such cases, mediation is often the best method, though application of this approach is far from being the rule. Some companies don't believe in mediation because, for example, it isn't regulated. Approaches to conflict resolution vary greatly, and there are as many kinds of dispute settlement clauses as there are companies.

When a contract is negotiated, it is better to determine in advance what mediation or arbitration firm will be used in case of a dispute. Then both parties know what rules will be applied if a conflict arises. The parties can also specify where cases are to be heard, and the location can be a country other than that of the two parties involved. Everything is open to discussion, and the right time for such a discussion is while both parties are on good terms. When the situation is more tense, the two parties will have to abide by conditions they agreed to in better days.

In a business world in which conflict is a daily occurrence, innumerable scenarios can result in disputes, including refusal to pay or deliver, complaints, intellectual property issues, share valuation or partnership issues. Better safe than sorry.

Illustration 1

International arbitration: growth in arbitration at the International
Chamber of Commerce over 20 years


1980  251
1985  333
1990  365
1995  427
2000  541

Note: Table made from line graph

Julie Demers ([e-mail]) is associate French editor of CMA Management.