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Making Your Country An International Arbitration Hub: Is It Even Possible?
By Ruslan Mirzayev, Adrem Attorneys
Recently, many governments have made efforts to establish their states as international arbitration destinations. This post discusses these emerging trends, as well as the challenges and factors affecting the prospects of such initiatives.
Emerging Trends - Current Initiatives
It is no secret that international arbitration is an expensive instrument of dispute resolution and not affordable for many local businesses. Most international arbitration cases and international arbitration law firms are concentrated in very few developed jurisdictions. Let alone international arbitration fees, legal fees in those jurisdictions in general have historically been very high in comparison with many other countries. Without availability of third party funding opportunities, many parties avoid bringing a claim in arbitration and when sued in arbitration may simply decide not to attend arbitration proceedings and later try to fight the enforcement of arbitral awards locally. In light of these concerns, many parties and law practitioners wonder why there are no less expensive locally-based international arbitration centers.
Recently, some international arbitration institutions have opened new offices in different parts of the world. In addition, some governments have also disclosed their desire to become regional arbitration hubs. For instance, Kazakhstan, Bahrain, Uzbekistan and Georgia have recently started implementing policies to develop as an international arbitration jurisdiction.
Georgia is currently cooperating with the ICC to make Georgia a regional arbitration hub. Bahrain cooperated with the American Arbitration Association to build its arbitration institution named BCDR-AAA (Bahrain Chamber of Dispute Resolution – American Arbitration Association). Tashkent International Arbitration Center Court of Arbitration[i] and the International Arbitration Center in Astana in Kazakhstan[ii] mostly include arbitrators from other countries (in case of the latter mostly from the UK and the EU). There are many other initiatives by different countries as well. Legislation of many countries has been modernized to accommodate these ambitious initiatives. [iii]
Such initiatives may require significant investments from governments and international organizations. But, is it worth investing in the development of international arbitration in all these countries? Do such initiatives have any prospect and will it be possible to attract cases from London, Paris and other strongholds of international arbitration to these new arbitral venues?
Indeed, developing domestic arbitration and developing international arbitration in a country are two completely different tasks.
Domestic arbitration serves as an alternative to domestic courts. Arbitration has well-recognized advantages vis-à-vis state courts, including flexibility, specialized arbitrators and finality of awards. Parties wishing to benefit from these advantages will be interested in having access to arbitration, as opposed to courts.
On the other hand, in order to develop international arbitration, the newly-emerging arbitration hub contenders will have to compete with historically preferred and developed arbitration jurisdictions such as Paris, London, the Hague, Geneva, Stockholm, etc.
In order to be able to compete in the international arbitration market and at least get some of the international arbitration cases, such contenders, in addition to favorable arbitration legislation, logistics and many other considerations, have to (i) ensure the legal certainty and (ii) in order to be more attractive, offer something that the currently well-recognized arbitration jurisdictions lack.
Before, during and after arbitration proceedings parties may have to deal with local state courts at the seat of arbitration. Parties may have to enforce arbitration agreements before local courts to refer the case to arbitration. They may request assistance of the courts in connection with the formation of arbitral tribunal and in obtaining interim measures. They may also be involved in setting-aside proceedings concerning arbitral awards before the courts at the seat of arbitration. Therefore, it is important for foreign parties to be confident in consistency of the court decisions in the seat of arbitration.
In this regard having pro-arbitration modern legislation is very important. Pro-arbitration legislation is a foundation for building an efficient arbitration system in any country. However, enactment of a very progressive, pro-arbitration legislation alone is not enough for becoming an attractive international arbitration jurisdiction. It is at least equally important how the courts at the seats of arbitration will apply it.
Foreign parties should not, and in fact usually do not, analyze the application of arbitration legislation in isolation. The rule of law existing at courts generally in a host state also affects the interpretation and application of arbitration legislation by such courts. If a government is able to exercise control over courts and influence their decisions with regard to other local matters, such court will not have credibility for foreign parties in connection with application of the arbitration legislation. If the government is used to controlling internal adjudication directly or indirectly, it is hard for states to refrain from using its eternal sovereign advantages in order to influence the judiciary.[iv] In other words, if a government is capable of influencing the judiciary in general, there is no guarantee that such government will not do the same in connection with arbitration.
Therefore, creating a special regime for international arbitration and/or establishing separate courts within their court systems specifically dealing with arbitration alone is not sufficient in order to persuade the international community to trust in the arbitration. The potential international arbitration jurisdictions shall be concerned in developing rule of law in general. In this regard, international indicators on the rule of law are important for a country positioning itself as an international arbitration jurisdiction. The world’s leading international arbitration jurisdictions, including but not limited to France, England, Netherlands, Sweden, Switzerland, USA, Hong Kong and Singapore, have very strong reputation in the rule of law[v] and have developed an established court practice in relation to arbitration.
Accordingly, one of the requirements for developing international arbitration in a country is to build strong rule of law. Building a strong rule of law will require inter alia ensuring the independence of domestic courts and legal certainty in their decision-making.
On the other hand, usually when parties enter into an arbitration agreement, they understand that a dispute under such an agreement may arise many years later. Therefore, it is also very important to persuade the international community that the available arbitration legislation, infrastructure and pro-arbitration approach of the local courts in the seat of arbitration are not temporary.
Making it Less Expensive
In order to allow foreign parties to choose a country as a seat of their arbitration, it is necessary inter alia to have favorable arbitration legislation and ensure rule of law in its application. However, if the lawyers representing the parties and the arbitrators are mostly based in another arbitration jurisdiction, it will make more sense for the parties to choose that other jurisdiction.
In arbitration the largest component of the arbitration costs is legal fees. For instance, in a recent study ICC found out that “party costs accounted for more than 80 per cent of the total costs of the arbitration.”[vi] According to the Full ICC Arbitration Cost Calculator of the International Arbitration Information, for a claim in the amount of USD 1 000 000, each party would incur costs around USD 609 847, out of which USD 500 000 represents legal fees and between USD 10 000 and USD 15 000 represents average fees for an arbitrator.[vii] Accordingly, in order to make arbitration less expensive, it is important to make attorney fees less expensive.
Thus, if parties utilize services of the same law firms they would utilize in prominent arbitration jurisdictions, their expenses would definitely not be less expensive, especially taking into account, flights, per diems and other expenses incurred by the lawyers for representing the clients in a foreign country. Therefore, unless a country offers high-quality services of local or at least regional professional arbitration lawyers, the arbitration may end up more expensive for the parties than in most prominent arbitration jurisdictions.
It is commendable that different countries around the world try to develop as arbitration jurisdictions. It will enlarge the international arbitration market. It is always commendable to have competition in any market and to fight monopoly of controlling market players. However, it is not commendable to invest millions of dollars of public money into some initiative without appreciating the challenges and difficulties to overcome.
[ii] Also discussed in http://arbitrationblog.kluwerarbitration.com/2018/09/19/why-arbitrate-at-the-astana-international-financial-centre/ and http://arbitrationblog.kluwerarbitration.com/2019/08/19/kazakhstan-internationalises-arbitration-law/.
[iii] http://arbitrationblog.kluwerarbitration.com/2019/08/19/kazakhstan-internationalises-arbitration-law/and https://globalarbitrationreview.com/insight/the-european-arbitration-review-2019/1175845/georgia
[iv] Thomas W. Wälde, “Equality of Arms” in Investment Arbitration: Procedural Challenges, printed in Katia Yannaca-Small ed., Arbitration under International Investment Agreements: A Guide to Key Issues, 161-188 (Oxford University Press 2010)
[vi] Micha Bühler, “Costs”, The Guide to Damages in International Arbitration, Global Arbitration Review, 2018