I will “sue” you in arbitration court…


In this short note we address some of the issues a party to cross-border agreement might consider when drafting a dispute resolution clause.

Arbitration is not a court

International arbitration has been around for quite some time, but at times it strikes us odd how business people and even lawyers misunderstand some of arbitration’s basic concepts.

It goes without saying, arbitration is not a “court” and it does not have a permanent location, unless parties choose one or it is set by default under certain rules.  We say this because in agreements we see reference to “arbitration court”.  If we can understand that arbitration is not a “court” (at least in the sense we have all used to it), that would certainly open a way for us to understand the flexible and contract nature of this dispute resolution mechanism.

In our practice the confusion between arbitration and court have led to negative consequences (“negative” depends on a party’s position).  One is being uncertain whether you want your dispute being handled via arbitration or in court.  The 1958 New York Arbitration Convention says that a court, when looking at a claim, must refer the dispute to arbitration, if the parties have agreed on arbitration, provided, among other things, the agreement is not “inoperative or incapable of being performed”.  A lot depends on local laws and court practices, but if a party confuses the court as to the exact choice of dispute resolution mechanism (arbitration vs court), the court might as well just consider arbitration agreement useless.

Location of Dispute Resolution

Obviously, parties can agree on the place of arbitration – that is the physical location where hearings would take place, or jurisdiction of foreign court.  To be sure, many jurisdictions allow parties to agree on jurisdiction of foreign courts in cross-border transactions.  For instance, in a contract between a party from Azerbaijan and UK, parties may agree to submit their disputes to jurisdiction of Azerbaijani courts.

Often the issue comes up as to where dispute resolution would take place.  There are number of factors (and not just one) parties must consider before they choose the dispute resolution venue.  A UK company might think English courts are more effective, and therefore, they better choose English courts.  Alternatively, arbitration is better than courts in Azerbaijan, so better choose arbitration in London.  But these are not always effective for a company.

We believe, at least in the context of Azerbaijan, in cases where the amount of dispute is less likely be significant, it is better to choose jurisdiction of courts where would-be defendant’s (respondent’s) assets are.  It is usually much cheaper and more effective to enforce court decision against the defendant’s assets.   This is partly because after a plaintiff obtains a court decision (or decision of a foreign arbiter), that decision must be enforced.  In some countries enforcement of foreign court judgments or even arbitral awards could be a complicated and expensive process.

Arbitration is usually not cheap, so you want to go for arbitration in cases where amount of claim is likely be significant.