ARBITRATION
Contribution by Mr. Jan Paulsson*
(Article Reference: Document No.1, Chapter 4, February 1992)

The debts of developing countries are commonly contracted in connection with the execution of industrial or infrastructural projects. Where the quality of goods and services supplied by the investor or supplier is defective, that developing country may be able to recover damages or restitution, or obtain the reduction or even elimination of the debt, by having recourse to legal review, typically international arbitration. Accordingly, the effective management of debt includes the effective use of the machinery of arbitration.

The topic of arbitration can be considered under three headings; why the process of international arbitration works - how it may be put into effect - and the requirements of success when a party actually participates in an international arbitration.

The international arbitral process works because awards may be enforced throughout the world in a much more effective manner than national court judgments. International treaties for the enforcement abroad of judicial decisions tend to be bilateral and can hardly be said to cover the globe. By contrast, mainly as a result of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards prepared under the auspices of the United Nations and ratified by about 80 countries, the courts of signatory States are bound to enforce awards rendered abroad. The only grounds on which the enforcement of such awards must be refused are grave violations of procedure, jurisdiction, or public policy (art. V. of the 1958 Convention).

Most of the signatories to the 1958 Convention have expressed the socalled reciprocity reservation, limiting the scope of the Convention's application to awards rendered in other countries which also are parties to the Convention. As a consequence, it is quite difficult for any party to propose a place of arbitration located in a country which is not a party to the Convention.

The second theme - how the arbitral process may be put into effect concerns the contract drafting techniques which should be used to obtain the most appropriate forum for the settlement of disputes.

Whereas in many international contracts the great majority of the clauses are carefully and intelligently negotiated and drafted, the jurisdictional clause is often shockingly inadequate. Obviously, rights under a contract are ultimately only as secure as the competent jurisdiction will make them, and hence a party which allows reference to a jurisdiction which is incapable of properly understanding the contract and its context, or worse will not act impartially, has in fact undermined the entirety of the contract.

Arbitration clauses are a subcategory of jurisdiction clauses. There are two kinds; institutional arbitration clauses, and ad hoc arbitration clauses. The former refers to a permanent institution which will: set the arbitral process in motion, principally by nominating arbitrators wherever necessary; monitor their performance and replace them if they fail to carry out their tasks or if they are legitimately challenged on grounds of bias or impropriety; establish and collect the arbitrators' fees; and issue the award with an institutional imprimatur. Ad hoc arbitration clauses do not refer to such' a permanent institution, but purport to be self-executing, either by setting forth in detail a full set of rules for the conduct of the arbitration, or else by referring to a preexisting body of rules such as the UNCITRAL Arbitration Rules of 1976. The disadvantage of ad hoc arbitration clauses is that they rely to a great extent on the voluntary cooperation of both sides, and tend to break down if the respondent acts obstreperously. Consequently, it is generally preferable to insert an institutional arbitration clause in the contract.

For the purpose of the settlement of disputes in which African developing countries are involved, three arbitration institutions are those commonly referred to in their international contracts. First and foremost is the International Court of Arbitration of the International Chamber of Commerce (ICC), which handles the greatest number of cases by far. The settlement of commercial disputes is only one of a great variety of activities of the ICC. The methods offered by the ICC for settling such disputes are various, including conciliation and expert opinions and so-called referee decisions. But by far the most important mechanism is arbitration, conducted by the International Court of Arbitration. This Court does not actually decide disputes, but nominates tribunals to deal with arbitrators (two of whom are generally party nominated) or of a sole arbitrator. Once the final award has been rendered, the tribunal disappears. The Court has nearly 50 members, most of them non?Europeans. Well over 300 cases are brought to ICC arbitration every year, most of them involving stakes of over a million US dollars, often tens of millions.

The next most active institution, although having less than one-fifth of the ICUs caseload, is the London Court of International Arbitration (LCIA). The LCIA has no activity other than arbitration. As in the case of ICC arbitration, parties referring a dispute to the LCIA may select a venue for the proceedings in any country of their choice. Having been until recently a predominantly English institution, the LCIA now, under its revised statutes, is composed of lawyers from all over the world; from Nigeria to Australia and Argentina, and also from the USSR and China.

The third institution is the International Centre for the Settlement of Investment Disputes (ICSID), established under the auspices of the World Bank pursuant to the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States. References to ICSID are often seen, not only in contracts but also in investment promotion laws as well as in bilateral treaties. However, only a few cases are actually submitted to ICSID. The reason may be an inherent restriction on ICSID's jurisdiction, namely the requirement that one of the parties must be a State. No State agency or parastatal company may validly refer a case to ICSID arbitration unless the State formally notifies ICSID that the agency or parastatal body concerned is to be deemed, for the purposes of the 1965 Convention, to have the same identity as the State. This notification is rarely given. As regards disputes directly implicating States, these are generally settled by negotiation, and hence resorting to the ICSID arbitral mechanism has remained rare. Nevertheless, the institution's potential importance is considerable, and negotiators of international contracts should be aware of it.

Other arbitral institutions to which international contracts may refer are either of a national character, hence unacceptable to one of the parties, or deal with a special industry only (i.e. shipping or the grain trade) and therefore outside the scope of the workshop's discussion. Nevertheless, it is inexcusable for the negotiator to accept reference to an arbitral institution about which he is insufficiently informed, as lazy negotiators sometimes do by simply copying a provision from an old contract.

As regards the theme; how does a developing country prevail as a participant in the international arbitral process? Five principles of conduct must be considered that enhance the country's chances of successfully defending its interests in international arbitration. The first three of these principles in fact come into play before the existence of any dispute.

1. Active and informed participation in the drafting and negotiation of the contract. It often happens that the drafting of contracts is so defective as to be prejudicial to the developing country concerned. Even in cases where the conduct of the other party seems clearly substandard, the contract may be so favourable to the other party that it is difficult to obtain an effective legal remedy. An obvious illustration would be a contract containing a limitation-of-liability clause that reduces a supplier's exposure to next to nothing.

"Active participation" means that the developing country's negotiator should not always be reacting to the other side's drafts, but should take the initiative to propose contractual provisions. "Informed participation" means that he should seek to understand all legally significant aspects of the text, and should not merely rely on the fact that the proposed clause has often been used elsewhere, or is allegedly recommended by some international organization as a model clause. For these reasons, lawyers should be consulted when deemed necessary.

2. Unified responsibility for related contracts. Large projects often require a number of contracts with several foreign parties; a management contract, a joint?venture shareholders' agreement, supply contracts, loan agreements, and often a government guarantee. If too many different persons are asked to handle disparate areas, there is a constant danger that they will see their responsibility in a very narrow way and that no one will accept the duty to ensure, as incidental aspects are modified, that the whole picture continues to make sense.

3. Diligent monitoring during the life of the contract. This task is so important that many institutions insist, when financing major construction projects, that expatriate consultants be engaged to act as supervising engineers. This stipulation is justified, for unless the supervising governmental authority concerned has competent and experienced personnel available to devote the required time to verifying the performance of a complex job, the absence of such a consultant is tantamount to an invitation to steal. The rigorous monitoring of contractual performance is not to be viewed as aggressive conduct, but as a matter of prudent management.

4. Active pursuit of legal remedies. The third world is littered with industrial "White Elephants", projects which have failed and stand as abandoned monuments to incompetence, negligence, or indeed dishonesty. Sometimes these failures may be attributable to bad luck, sometimes to the inexperience and failings of nationals of the host country. But it also happens that the blame for the failure attaches entirely or at least partly to over promising and under performing foreign managers, investors, or suppliers. It is astonishing that only rarely does a developing country make a serious attempt to determine whether there is a legal case to be made against such parties. Obviously, a developing country which considered that it had suffered prejudice through the nonperformance or negligent performance of a foreign contractor would have to weigh the chances of succeeding in a suit for damages against the risk of failing to obtain satisfaction. In such circumstances the decisive element would not only be the de facto situation (e.g. the quality of the equipment or services supplied) but also the terms of the contract, which might be heavily weighted in favour of the foreign party. In addition the developing country has to take the expense of litigation (arbitration) into account.

5. Getting expert assistance. A developing country which decides to resort into international arbitration involving high stakes must be determined to spare no effort. Where large amounts are at stake, experienced counsel should be retained not only for advocacy, but also to provide an efficient team to conduct evidentiary research and to give informed advice with respect to the complex procedural issues which inevitably arise in international arbitration, not least that of the composition of the arbitral tribunal. In addition to specialist lawyers, it is frequently necessary to retain technical experts to give their analysis of the nature and causes of failures.

For some third world parties, the cost of international arbitration seems prohibitive. It is true that large amounts of hard currency are required to participate effectively in a major international case, but it would appear even more costly to abandon much larger legitimate grievances on account of the expense involved. Many such disputes arise out of projects which are financed by international institutions, and a reasoned application to include the expenses of a justified arbitration within the overall project cost has never been rejected. After all, it is very much in the interest of the donor or the lender that all means of recovering losses are explored, as they may lead to an improvement in the overall financial situation of the project.

* Mr. Jan Paulsson (United States of America) - Mr. Paulsson specializes in international arbitration and has participated as counsel or arbitrator in some 60 international arbitral proceedings, of which 46 under the auspices of the International Chamber of Commerce, and 22 involving States as parties. Mr. Paulsson was Lead Counsel to the States of Cameroon and Guinea in proceedings before the International Centre for the Settlement of Investment Disputes in Washington; most frequent types of disputes were construction claims, price adjustments in long-term supply agreements, issues relating to joint ventures and other forms of investment. Born in 1949, Mr. Paulsson obtained a doctorate in law from Yale Law School and a Diplôme d'etudes supérieures spécialisées from the University of Paris.

(The above author profile was written in February 1992)