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We offer to the blog's readers the following analysis by Andrew de Lotbini?re McDougall and Kirsten Odynskiwith, titled - “Business Case” For and Against International Arbitration”, posted here:

Considering the juicy content of the analysis we decided to publish it here with minimum cuts. I allowed myself to make some analogies with Bulgarian reality.

A 2013 survey conducted by Price Waterhouse Coopers and Queen Mary, University of London found that corporations across all sectors refer as many disputes to international arbitration (47%) as they do to litigation (47%).
These survey results indicate that while international arbitration is a popular method for resolving disputes, corporations must regularly make the choice (especially in the case of complex cross-border transactions ) between international arbitration and litigation, and the two methods are equally important.



When we talk about international arbitration there are some bussines risks common in cross-border transactions which the corporations must consider.
The aim of this paper is to identify and assess the effectiveness of some of the tools that can be used to manage each of these risks.

I. OPERATING IN A GIVEN COUNTRY

WHAT ARE THE BUSINESS RISKS?
Cross-border transactions by definition involve multiple jurisdictions. Frequently, the subject of the investment or transaction will be located in a country other than a corporation’s home country. The degree of risk is likely to be lesser in stable or so-called developed countries such as those in North America and Western Europe and is likely to greater in unstable or so-called developing countries such as Algeria, the Congo, Venezuela, China or Kazakhstan.
The risks of operating in a given country can be categorized as follows:
• Political and legislative risks
• Industry risks
• Judicial risks
Political and legislative risks are caused by government acts or other events including expropriations, the imposition of exchange controls, revolutions and other civil disturbances that may have an adverse impact on transactions or investments.
Industry risks result from a given government’s tendency to exert control over domestic natural resources. This tendency can be triggered by a variety of events such as increased demand for energy, prolonged conflicts, international embargos, or concerns about energy security.
Governments can exert control over natural resources by limiting foreign investment, changing the terms of existing contracts to maximize revenue, or by engaging in other forms of economic coercion.
* In Bulgaria such а negative phenomenon recenty and precisely expressed just a few days ago was the vote by the Parliament to extend the moratorium for the acquisition of land by foreigners, which is completely contrary to the principles and norms of the EU.
Judicial risks result because the justice system in a given country has a poor reputation for neutrality and impartiality or may be corrupt. Judicial risks may arise where there is a possibility that the State will interfere with the judicial proceedings.
* Such doubts about the Bulgarian judicial authorities breeds the controversial decision of the Constitutional Court regarding the disputed for months parliamentary position of Delian Peevski because of the existence of conditions incompatible with the deputy position.
Transparency International’s Corruption Perceptions Index, which ranks countries on how corrupt the public sector is perceived to be, is one measure of the judicial risk in a given country.
The 2012 Corruption Perceptions Index found that 70% of countries scored less than 50 out of 100.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THE BUSINESS RISKS?
International arbitration is an effective way to mitigate the risks of operating in a given country. This is because it is possible for the forum for dispute resolution to be somewhere other than that country. The seat does not have to be connected to the nationality of the parties, the location of the investment, or even the substantive law of contract. As such, the parties are free to agree on a neutral location free from perceived or actual bias and corruption. The ability to select a location other than the given country in which one is operating may be particularly advantageous where States or State-owned entities are involved.
In addition, parties to an international arbitration can further mitigate the business risks of operating in a given country by electing to use an international arbitral institution to administer their arbitration. Generally, international arbitral institutions are neutral and independent bodies that provide services aimed at facilitating the dispute resolution process.
Services provided include assistance appointing the arbitral tribunal, assistance facilitating the resolution of urgent disputes, assisting with the logistics of the arbitration, fixing arbitrator remuneration, and stepping in to address possible complications with the commencement of the arbitration proceedings.
It should be noted that not all arbitral institutions are neutral and independent of the country they are located in. With the proliferation of arbitral institutions around the world, parties should choose their arbitral institution carefully to ensure that the one used is truly neutral and independent.
In sum, the selection of a neutral place of arbitration and the use of a well-established international arbitral institution can be effective ways to manage the business risks of operating in a given country. By way of comparison, it is more difficult to manage business risks of this nature with litigation.
In general, jurisdiction over a given dispute and a given contracting party will likely only be found in the courts of the parties’ to the dispute. Thus, at least one party is likely to feel that they are at a disadvantage because the other side has a “home court” advantage. In addition, the services offered by international arbitral institutions are not typically offered by courts and can help to ensure that the proceedings are neutral, fair and effective.

II. COMMERCIALLY SENSITIVE OR TECHNICAL DISPUTES

WHAT ARE THE BUSINESS RISKS?
Almost invariably, disputes arising in connection with cross-border transactions present the business risk that commercially sensitive information like estimated value of a reserve, the amount spent on research and development or valuable commercial know-how will become public. Disclosing the existence of the dispute itself may reveal sensitive information.
Disputes arising in connection with cross-border transactions are also often of a technical nature involving complex contractual structures and specialized subject matters.
Two different types of risks arise in connection with such disputes. The first is that the applicable procedure will not be well suited to deciding complex or technical cases. The second is that the decision maker will not have experience with large complex disputes.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THE BUSINESS RISKS?
1. Commercial sensitivity
Unlike court proceedings in many jurisdictions, arbitration proceedings are private and not open to the general public.
While international arbitration proceedings are private, they are not necessarily confidential. The rules of most international arbitral institutions and the laws of most countries do not prohibit a party from disclosing to non-parties the existence, nature or other facts about an arbitration. By way of an example, neither the International Chamber of Commerce (“ICC”) Rules nor the ICSID Arbitration Rules contain confidentiality obligations. It follows that if confidentiality is important, the parties should expressly provide for it. Indeed, this is commonplace in international arbitration today. Parties can agree to keep the existence and nature of the facts about an arbitration confidential by including a confidentiality provision in the arbitration agreement by designating a set of arbitration rules that provides for confidentiality, by selecting a seat of arbitration in which the lex arbitri provides for confidentiality, or by agreeing with the arbitral tribunal once constituted.
In sum, the risks posed by commercially sensitive disputes can be managed by international arbitration as it is private and provides several mechanisms pursuant to which the parties can agree to confidentiality. Contrariwise, to promote transparency, the judicial proceedings in many countries are open or accessible to the public in different ways.
2. Disputes of a technical nature
International arbitration provides two tools helpful to managing the business risks posed by disputes of a technical nature. These risks are that the decision maker will lack the necessary experience and that the procedure is not well suited to the resolving a particularly technical dispute.
The first tool is being able to select the decision-maker, in other words appropriate arbitrators to resolve the dispute. The following factors should be considered when selecting an arbitrator:
• Experience
• Background, including nationality, language, education and age
• Approach that the arbitrator is likely to take
• Reputation
• Impartiality
• Independence
• Managerial abilities
Depending on the precise nature of the dispute, an arbitrator experienced in arbitration procedure may be preferable to one with a highly technical background.
The second tool useful in mitigating the business risks posed by particularly technical disputes is to make use of experts. Experts generally play an important role in international arbitration. Infact, according to the statistical studies the expert witnesses are involved in two-thirds of arbitrations.
The use of a variety of experts allows the users of international arbitration to ensure that the arbitral tribunal has available to it sufficient information to make an informed decision on any number of issues. Moreover, as experts may be appointed by the arbitral tribunal itself, the parties or both, there is a better likelihood that an arbitral tribunal will have access to the information it needs to make decisions of a technical nature.
Parties can have free and open discussions with experts about all of the possible issues in dispute and can work with them directly without generally having to worry that everything they share with the experts is subject to being disclosed to the other side.
In sum, the business risks posed by disputes of a technical nature can be managed through the selection of appropriate arbitrators and the use of experts.

III. LENGTHY OR COSTLY PROCEEDINGS

WHAT ARE THE BUSINESS RISKS?
The lengthy or costly proceedings have the potential to adversely impact commercial relations, the allocation of resources, or exploitation rights. Moreover, such proceedings may have a negative impact on finances, share prices, and future business opportunities. Finally, lengthy disputes may impact a party’s reputation.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THESE BUSINESS RISKS?
Assessing whether the length and cost of proceedings can be managed through the use of international arbitration is not a straightforward task.
International arbitration is final. The result of an international arbitration proceeding is to create a binding and enforceable award that is generally subject to no rights of appeal on the merits. This is provided for in the rules of most major international arbitral institutions. Further, arbitral awards are relatively easy to recognize and enforce around the world according to the terms of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).
It follows that, in theory, arbitration proceedings should be less lengthy and less costly than court proceedings, which generally give parties a right of appeal on the merits. In practice, however, the length of arbitration proceedings varies greatly depending on which jurisdiction’s court proceedings they are compared to as well as on the nature of the dispute, the conduct of the opposing party and its counsel and the conduct of the arbitrators.
For example, in some countries like France, a relatively simple commercial court case may take less time and cost less than an international arbitration.
There are also a number of particular circumstances in which arbitration proceedings may end up being longer than court proceedings. This may occur when, for example, the dispute could have been decided on a preliminary or summary basis.
Alternatively, arbitration proceedings may be lengthy where a recalcitrant party takes steps to delay the proceedings, such as by refusing to appoint an arbitrator, bringing a jurisdictional challenge or refusing to participate in the proceedings altogether. An arbitral tribunal can do little to prevent the delays caused by a recalcitrant party because, unlike judges in national courts, arbitrators have limited coercive powers.
However, parties can take advantage of the procedural flexibility in international arbitration to manage the length or cost of arbitral proceedings. Steps that a party may consider taking include:
• Appointing an arbitral institution to help manage the proceedings
• Attempting to name or agree on arbitrators known to conduct efficient proceedings
• Negotiating a short procedural timetable
• Seeking to bifurcate the proceedings such that key issues which may resolve the dispute or lead to an early settlement are decided first
• Agreeing to place limits on the number and length of submissions and on any discovery

An alternative way to limit the length and cost of the proceedings is to use multi-tiered dispute resolution. The goal of multi-tiered dispute resolution is to make arbitration a last resort to be used only after more amicable and less expensive dispute resolution mechanisms have failed. The tiers used should be adapted to the scope and size of the dispute and may include negotiation, assisted negotiation, mediation, expert determination or dispute boards.
Multi-tiered dispute resolution is not always effective in practice. It will not work where any one of the parties fails to engage in the process in good faith.
In sum, while arbitration proceedings have the potential to be shorter or less costly than judicial proceedings, this is not necessarily the case in practice.

IV. MULTIPLE CONTRACTS

WHAT ARE THE BUSINESS RISKS?
Complex business transactions often involve multiple related contracts, which may be between the same or between different parties. In the case of multiple contracts, two distinct problems may arise in connection with a dispute.
First, there is a risk that a particular dispute will not be covered by the scope of the preferred dispute resolution clause.
Consider for example a large construction project governed by three related agreements, Contract A, Contract B, and Contract C. Contract C is the only one of the three contracts that contains an arbitration clause. If a dispute arises as a result of Contract A or Contract B, there is a risk that it will not be covered by the scope of the arbitration clause in Contract C and thus not be subject to arbitration as the method of dispute resolution.
Second, multiple contracts create the risk that a single dispute will result in several different dispute resolution proceedings.
This risk may arise in connection with a large construction project involving the owner, the main contractor, several suppliers, and several subcontractors, each operating under a different contract. A dispute over a damaged piece of equipment supplied by one of the suppliers and installed by one of the subcontractors may result in litigation or arbitration between the main contractor and the subcontractor, between the subcontractor and the supplier, and between the owner and the main contractor.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THESE BUSINESS RISKS?
As arbitration is based on consent and, as a result, arbitrators’ lack coercive powers, the general rule is that an arbitration clause only extends to the contract that it is contained within. The existence of this general rule makes it difficult to manage the business risks posed by multiple contracts.
Before a dispute has arisen, a party can ensure that an arbitration clause will extend to all disputes arising in connection with a given project by accounting for the existence of multiple related contracts in the arbitration agreement. This can be done by inserting the same arbitration clause in all related agreements or explicitly providing that the parties agree to have related disputes heard in the same arbitration. Alternatively, the parties to the project could agree to enter into a standalone dispute resolution protocol (also known as an umbrella arbitration agreement) covering all related contracts.
After a dispute has arisen, it also may not be possible to mitigate the risk of multiple proceedings. Joining two or more separate arbitrations into a single arbitration where a single tribunal will render a single award is commonly referred to as “consolidation”. In general, consolidation is only permissible where the parties have explicitly or implicitly consented to such consolidation.

In sum, unless accounted for in the arbitration agreement before the dispute has arisen or unless consent is forthcoming from all of the parties concerned after the dispute has arisen (which is usually not the case when the parties are in dispute), international arbitration can do little to manage the business risks posed by multiple contracts.

V. MULTIPLE PARTIES

WHAT ARE THE BUSINESS RISKS?
The business risks posed when a single project involves multiple parties are similar to those posed by multiple contracts.
First, there is a risk that not all of the parties necessary to resolve the dispute are obliged to participate in the arbitration.
This scenario may arise when an entity related to the contracting party causes the damage rather than the contracting party itself.
Second, multiple parties pose the risk of multiple arbitrations, each of which may involve different parties.
For example, in an energy project there may be a dispute between the State and the contractor and there may at the same time be a dispute between the contractor and one or more of its subcontractors regarding the underlying events that are related to the contractor’s dispute with the State. These disputes may result in parallel proceedings that could lead to different conclusions about the same facts.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THESE BUSINESS RISKS?
To be effective, a multi-party arbitration clause should provide that each party consents to arbitration against every other party, ensure that every party is given notice of the arbitration proceedings, and provide a mechanism for appointing the arbitrators.
Providing a mechanism for the appointment of the arbitral tribunal is particularly important because the traditional appointment method whereby each side selects an arbitrator and then those two parties or their two party-named arbitrators select the chair is ill-suited.
Accounting for multiple parties in the arbitration agreement is, of course, only possible when the existence of multiple relevant parties is known at the outset. This is often not the case in practice as parties sometimes only later learn of the existence of or need to involve a related entity.
Joinder means adding an additional party to an existing arbitration at the request of an existing party and intervention means adding an additional party to an existing arbitration at the request of that party. Whether and under what circumstances an arbitral tribunal will permit an additional party to be added to an existing arbitration is an extremely complex area of arbitration law and practice that has given rise to divergent opinions and decisions.
In sum, unless accounted for in the arbitration agreement before the dispute has arisen, international arbitration can do little to manage these business risks posed by multiple parties.

VI. ENFORCEABILITY

WHAT ARE THE BUSINESS RISKS?
Even if a party wins a dispute and obtains a favourable decision, there is the business risk that the losing party will not voluntarily comply with the decision. If the losing party fails to comply, the successful party will need to commence a separate legal proceeding in order to enforce its favourable decision. In general, enforcement or recognition proceedings are brought before the local courts of a country in which the debtor has assets that can be realized in satisfaction of the decision. Depending on the nature of the contractual counterparty, it may difficult to find such a jurisdiction or necessary to bring enforcement actions in more than one jurisdiction. Separate local enforcement proceedings pose their own risks including.

CAN INTERNATIONAL ARBITRATION HELP MANAGE THESE BUSINESS RISKS?
One of the principle advantages of international arbitration as compared to court litigation is the greater international enforceability of arbitral awards.
Тhe risk that the losing party will not comply with an international arbitral award is relatively small according to some statistical studies.

As a guarantee that the international arbitral awards are more readily enforceable than national court judgments is the New York Convention, which has 149 State parties and provides a mechanism for the recognition and enforcement of arbitral awards.