Move your receivable disputes out of the courtroom and into the conference room ” and you could drastically cut your international litigation budget! Opting to go with Final and Binding Arbitration not only reduces expenses ” it can speed up your recoveries as well.
What is Final and Binding Arbitration?
Final and Binding Arbitration is a form of Alternative Dispute Resolution (ADR). It should not be confused with court-mandated arbitration, which is non-binding. If used intelligently, it is one of the most powerful tools at your disposal in international collection cases.
In order to utilize this form of ADR, both parties “buyer and seller” must agree in writing that any dispute which they cannot settle between themselves will be referred to a particular arbitration entity at a particular location. The location should be the seller’s country/state/city ” NOT the buyer’s. The perfect place to include such an agreement is in the credit application or sales contract.
The legal authority for the strength of arbitration in the United States is found at both federal and state levels. The United States Congress, in adopting Title 9 (The American Arbitration Act), has clearly stated that it is the national policy of this country to favor arbitration over litigation as a choice of forum when there is a written Arbitration Agreement existing between the parties to a dispute. Title 9 has been upheld by the United States Supreme Court in many decisions. At the state level, all 50 U.S. states have laws regarding Alternative Dispute Resolution in their jurisdictions.
The international community has also long recognized the significance of international arbitration. In 1959, more than 85 countries signed the New York Convention on the Enforcement of Foreign Arbitral Awards (a United Nations treaty) to guarantee that each participant in the Treaty would enforce the arbitration awards of other participant jurisdictions. To date, 148 countries have signed the 1958 NY Convention.
What are the advantages of Final and Binding Arbitration?
Once the parties agree to the arbitration process, neither can change his/her mind at a later date. In fact, if one of the parties refuses to arbitrate, the other party can compel arbitration by court intervention.
Generally, arbitration doesn’t take longer than 9 months from start to finish; making it much faster than litigation, which can take years. Once an Award is made, Judgment on Arbitration can usually be obtained within 60 days by submitting a Motion to the appropriate court where the losing party is located. With Judgment on Arbitration in hand, you are then free to pursue post-judgment remedies, just as though you had gone through the litigation process.
What is the real effect of all this for the seller/creditor?
A Final and Binding Award is almost always irreversible when it is made by a competent arbitration body against a customer residing in a signatory to the 1958 NY Convention. There are practically no grounds for any appeal process or judicial review of an arbitrator’s award.
Let’s make that last statement a bit stronger. Judges are actually forbidden to review an arbitrator’s award with respect to case merits and they are compelled to uphold the final and binding nature of the award, with only some narrowly-defined exceptions, including:
- Lack of a signed arbitration agreement
- Failure of the arbitrator to hear relevant evidence
- Straying by the arbitrator from the issues given for consideration
- Involvement of issues of the civil rights of an individual. (In the U.S., issues involving an individual’s civil rights permit that individual to force a trial of the facts in the face of an adverse award)
- Lack of receipt by the respondent of the Notice of Arbitration, or defective Notice.
What does arbitration cost?
In terms of money, arbitration can be more or less expensive than litigation depending upon several factors:
- The jurisdiction involved
- The amount in dispute
- The particular arbitration panel
Arbitration between two parties located in the same country may be somewhat expensive compared to domestic litigation, especially in cases where the attorney fee is partly or fully contingent upon collection. However, if your buyer is located in Tokyo and you in the United States, the arbitration fee becomes insignificant compared to hourly fees of a Japanese attorney plus travel costs for a witness to go to Japan.
The same principle holds true for a seller located in, say, Malaysia; that is, arbitration in Malaysia is far less costly than having to fly to the United States to support a lawsuit.
What are the tactical advantages of arbitration?
- Note that the United States does not have reciprocity of legal judgments with any other country. However, it is a signatory of the 1958 NY Convention. If both the seller’s and buyer’s countries are signatories to the 1958 NY Convention, the local Court is obligated to uphold the award with only the narrowly-defined exceptions mentioned above.
- A legal judgment issued in your country may not be enforceable in the buyer’s jurisdiction. You may be required to start the entire process over again in the buyer’s locale, despite a court judgment in your favor.
Adding an Arbitration Clause to your credit application, contract, or other document permits you, the seller, to specify jurisdictional location and method of recovery. It also gives you the right to determine the language of the arbitration, the number of arbitrators, and to include the requirement that the losing party pay all arbitration expenses. (See the sample Arbitration Clause below.)
- It is always advantageous to fight a battle on your own ground. It puts the burden on the other party to travel to your corner of the globe. In fact, because of distance, most foreign buyers totally ignore the arbitration process.
- Lawsuits can be overturned by the appeals process; a remedy almost never allowed under arbitration.
- The setting of arbitration is far less imposing than a courtroom. Arbitrations generally take place in conference rooms and are attended by relatively few people. The atmosphere is more relaxed, and testimony can be given with much less nervousness than in the cold environs of the court.
- The burden of proof in arbitration is much more in the creditor’s favor. The test of evidence applied by an arbitrator is one of “What should reasonably be considered by the common man.” The civil law (litigation) test is the “preponderance of the evidence.” Under civil law, very strict rules apply in laying a proper foundation for the introduction of evidence. The arbitrator, however, simply applies the guide of “reasonableness.” If you have seen customers contrive outrageous counterclaims in the civil process, which can only be dispelled by hard-hitting contravening testimony, then you can appreciate the value of the test of “reasonableness.”
How should an arbitration clause read?
A sample clause adapted from the American Arbitration Association might read:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration in accordance with the International Arbitration Rules of the American Arbitration Association. The arbitral award shall be binding and final. The number of Arbitrators shall be one. The place of arbitration shall be __________________ (your jurisdiction). The language of the arbitration shall be ________________ (your language). Judgment on Arbitration may be entered by any court having jurisdiction thereof. The losing party shall pay all costs and expenses of the arbitration as well as all costs and expenses attendant to any necessary enforcement procedures to collect the Award.
How do you circumvent the games customers play?
As noted above, one of the grounds for vacating an Arbitration Award is that the respondent was not properly notified of the Arbitration. As this is one of only a few means of overturning the award, a “smart” respondent might claim he was not properly notified, or that he had never even signed the Arbitration Agreement in the first place.
Preventing the customer from claiming he was not properly notified
The arbitral authority sends both parties the notices of arbitration, so your best defense is to:
- Make duplicates of every notice issued by the arbitral authority and have them translated into the customer’s local language;
- Hire a private processor server to serve the duplicates on the customer; and
- Provide your attorney (or agency) in the buyer’s country with copies of these notices, together with proof of delivery.
Eliminating customer’s claim that he did not sign the Arbitration Agreement
Despite the Arbitration Agreement, go ahead and file a lawsuit. More often than not, the customer will file an Answer citing the Arbitration Agreement and the improper forum of litigation. Once he does that, he’s trapped himself into the Arbitration proceeding. He cannot claim he didn’t sign the Arbitration Agreement since he just used it in his Answer to the litigation.
At this point, your representative can submit a motion to the Court to stay the proceedings pending the outcome of the Arbitration, thus forcing the customer to the arbitration table. The stay of proceedings would be requested on the grounds of Convenience of the Court.
Since the outcome of the arbitration is likely to result in an award, the same court will be required to hear a motion for Judgment on Arbitration. It is more economical for the Court to merely stay the litigation than to dismiss the lawsuit. In addition, since the lawsuit was filed “in good faith”, it would be an undue burden on you, the plaintiff and creditor, to present an entirely new lawsuit to the Court when one lawsuit should be sufficient.
Even if the court refuses to stay the litigation and insists upon dismissal, your lawyer can plead for the court to compel the participation of the customer in the Arbitration. Either way, you end up with a firm court decision that the customer must participate in the Arbitration process.
More information on Arbitration
United Nations Convention on International Trade Law (UNCITRAL): Complete text of the New York Convention in several languages.
American Arbitration Association: Comprehensive site for up-to-the-minute information about mediation, arbitration, and other forms of alternative dispute resolution (ADR).
Browse through our other credit management articles below:
- Basic Outline for Developing a Credit Policy
- Cash Flow and DSO
- Credit and Collection Policy Basics
- Credit Extensions are Loans
- Credit Group Spotlight: GAIN
- Credit Group Spotlight: NCCA
- D/P, D/A and Their Use in International Sales Transactions
- DuPont Analysis
- Measure and Manage Collection Efficiency Using DSO
- Receivables Based Financing
- Resolving A/R Disputes
- The Proforma Invoice and Its Value in Export Sales
- Understanding the Balance Sheet
- Understanding the Cash Flow Statement
- Understanding the Income Statement