Contribution by Mr. Jan Paulsson*
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
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.
above author profile was written in February 1992)