International arbitration has grown considerably over the past decade as an option for companies facing international disputes either with countries or other companies. Most courts of international arbitration have seen significant increases in the number of cases filed – approximately 74 percent during the period from 1998 through 2008.1 This growth can be attributed largely to the infrastructure these courts provide in helping companies to expedite and streamline the international arbitration process. Ad hoc solutions to international arbitration can be costly and time-consuming due to the absence of relevant parameters for the arbitration process.
Understanding the many facets of international arbitration is key for companies involved in international disputes and seeking the best options for resolution.
Challenges and Opportunities
International arbitration can be a costly venture, thus companies should carefully evaluate their decisions to enter into it. Strong feelings attached to a significant dispute, for example, can lead to emotion-based decisions to pursue international arbitration without considering other important factors. A first crucial step in the decision-making process should be to perform a pre-arbitration assessment of damages – sometimes referred to as a “back of the envelope” analysis since often it is prepared with only limited documentation and is intended to be a preliminary estimate.
In determining whether to move forward with international arbitration, companies must consider three key areas: costs, length of time and damages.
Companies must understand the direct and indirect costs of international arbitration. There are up-front costs for filing an international arbitration claim, and some courts require deposits associated with expected arbitrator costs as well as anticipated awards. In addition, professional fees and travel costs tend to be high in international arbitration. Using a global law firm with high dispersion of resources is a cost-effective option, and often it is possible to set up alternative fee arrangements to help control expenses. Additionally, there are a handful of private hedge funds that provide financing for international arbitration cases in exchange for a percentage of any arbitration awards.
It also is important to consider opportunity costs associated with international arbitration. There is substantial risk of irreparable damage to business relationships with dispute counterparties. In the case of international arbitration with countries, companies could lose business opportunities within that country in the future.
Length of time
International arbitration can be an extremely lengthy process depending on the issues involved, counterparties’ actions and arbitrators selected. The initial hurdle with most international arbitration courts is jurisdiction. Arbitration panels may take a year or longer to ascertain whether or not the court of arbitration in question has jurisdiction to hear the case. The arbitration process often exceeds three years before an award is made, and many awards are then challenged, lengthening the process even more.
Once an award is made and successfully stands through any challenges, the final step is enforceability, which can further extend the process. Enforceability depends on the counterparty to the arbitration. Often times, enforcement is easier against corporate counterparties than foreign governments, assuming the corporate opponent is solvent and in sufficient financial condition to remit any award. In the case of foreign governments, enforcement may be much more difficult depending on the country’s historic view toward foreign verdicts and its commitment to honoring them. There have been cases of awards that have gone more than 10 years without successful enforcement.
Awards in international arbitration are made by a panel of arbitrators. It is not uncommon for arbitrators to select a damages amount that does not concur with amounts offered by either party to the arbitration. Historically, damage awards are smaller than the amounts claimed in international arbitration. In bilateral investment treaty arbitration, the amount claimed represents the value of the foreign investment in the country that was lost due to the actions of a foreign sovereign. In these cases, the interpretation of what constitutes an investment can result in a significant difference in the values proffered by claimants and respondents.
Companies must include in this process all of their investment in a foreign country. Often, the focus is on a key asset or group of assets but excludes other core assets that are necessary to the investment as a whole. Key arguments in these cases normally revolve around book value versus market value, choice of discount rate, projections of financial performance, foreign currency impacts and forecasts of commodity prices. While proven financial success is always preferable, nationalizations often occur prior to significant financial success and valuation requires projections of performance.
Our Point of View
International arbitration can be an effective method for resolving disputes, but companies must prepare for and enter into it in an appropriate manner. If your organization is facing an international dispute, consider the following:
- Is this a matter for a court of international arbitration? This often is more efficient and easier to begin than ad hoc solutions.
- What is the business case? Perform a preliminary damages assessment to provide the framework for business analysis. This allows companies to evaluate the business case objectively.
- How much will it cost? Evaluate filing costs, required deposits, professional fees, expected travel costs and potential opportunity costs.
- Is your company prepared for the resource and time commitment international arbitration may require?
- What is the correct measurement of damages? Does the court selected allow those types of damages?
- What are our strategies for cost management? Consider options such as alternative fee structures or financing through a private equity fund.
How We Help Companies Succeed
Protiviti provides in-depth expertise in international arbitration. We are a global firm with professionals possessing extensive language and business skills specific to their home countries. This structure allows us to assist clients in an efficient manner that reduces travel costs while assisting them throughout the arbitration process. From preliminary damages assessments to hearing testimony, our professionals provide world-class consulting services to our clients engaged in international disputes. At Protiviti, we build teams that are designed specifically to meet the unique needs of our clients.
Protiviti team members assisted a large multinational oil company in its dispute with a former merger partner. The team calculated damages incurred by the client due to a failed merger with another company. This calculation required valuation of international assets, evaluation of the due diligence activities of the former merger partner, analysis of international economics of the oil and gas industry during the relevant time period, review and discussion of the responsibilities of auditors, analysis of applicable international accounting standards, and evaluation of the impact of a foreign country’s accounting methods. Our client’s counsel described our expert on the matter as “… one of the best quantum experts in international arbitration.”