Even before the COVID-19 pandemic, companies entering into international agreements were well-advised to include arbitration clauses within those pacts. The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the “New York Convention,” ensured that such awards would—except in extremely limited circumstances—be enforceable in any of the 165 contracting countries. It thereby removed the monumental, often insurmountable, hurdle of getting American court judgments enforced in a foreign nation—one that might have a generally dim view of the U.S. legal system overall.
Choosing arbitration in international agreements also removes the concerns and practical problems that often arise in cross-border litigation. In the absence of an arbitration clause, American companies face the prospect of litigating in unfamiliar legal systems that often differ markedly from that of the U.S., and which likely place strict limits on (or outright prohibit) discovery and jury trials—a thought likely to rattle any U.S. trial attorney. The foreign counterparty, too, faces the potential uncertainty of litigating in the American system, where discovery and jury trials—while commonplace to us—seem shocking to them. Each party’s desire to litigate in its home court often creates a “race to the courthouse” that escalates disputes rather than resolving them.
To manage this uncertainty, parties can also negotiate for the inclusion of forum-selection clauses. Unless your company has significant leverage or is willing to offer substantial concessions, though, securing a forum-selection clause in your own backyard can be difficult. And while the parties can always choose a neutral country as a dispute forum, that means both will then face the expense of litigation in an unfamiliar system.
Arbitration clauses alleviate these concerns. Parties can choose whatever forum they want, neutral or not, and be assured that a well-established, well-honed procedure for international dispute resolution will govern their arbitration. When the case proceeds to final award, the parties are likewise typically assured of its enforceability in both countries.
The pandemic has added another major reason to include an arbitration clause in international agreements. Without such a clause, your dispute—no matter how big or urgent—might linger for years in an American or foreign court system that has been wracked by COVID-19. Arbitration ensures that your dispute will be promptly and fully adjudicated.
This March, at the outset of the outbreak, many courts across the U.S. radically curtailed or even suspended their operations. Although most have now adapted to conducting motion practice and other hearings via Zoom and other videoconference tools, jury trials—the hallmark of the U.S. legal system—are still virtually nonexistent. In July, for example, the Texas Supreme Court ordered the suspension of all in-person jury trials through at least September 1, with few exceptions. In August, with cases soaring in Texas, it extended that suspension through October 1—a date likely to be pushed back further still. The Southern District of Texas—a hotspot for both international commercial litigation and COVID-19—has “continued” all jury trials until further notice.
The Lone Star State is not alone. Numerous other state and federal courts suspended or curtailed jury trials for the foreseeable future, including the Southern Districts of New York and Florida, and the Central District of California. And while courts in Texas and other states have conducted test jury trials via Zoom, those experiments have been few and far between, and unlikely to gain widespread acceptance due to their obvious logistical and practical difficulties. A recent survey by the Texas Office of Court Administration found that fewer than 20 percent of attorneys were in favor of remote jury trials. With COVID-19 cases still increasing across much of the U.S., it’s not unrealistic to assume that in-person jury trials will not resume in the U.S. until well into 2021.
Due to their much smaller reliance on civil jury trials, other countries’ legal systems are less at risk from the lingering effects of the pandemic—a fact that offers little comfort to an American company that wants nothing to do with litigation in a foreign setting.
The legal systems of many countries, including those in Europe, have nonetheless encountered significant pandemic-related disruptions. Some have even halted the process for effectuating service of foreign juridical documents under the Hague Convention. If effective service of process is unavailable in international disputes, a suit might not even begin (even if filed in the U.S.), much less proceed to timely disposition.
In stark contrast to the world’s legal systems, however, arbitrations have continued largely unaffected by the pandemic. The American Arbitration Association (AAA) alone claims to have resolved nearly 200,000 cases since March.
Several factors explain why arbitration, unlike court proceedings, provides a stable forum for companies that need prompt and certain dispute resolution: First, parties in arbitration have always relied on remote means rather than in-person appearances to advance disputes. They rarely, if ever, appear before the arbitrator prior to the final hearing, and any necessary communication is typically done via phone or email—preexisting practices unaltered by the COVID-19 outbreak. Most courts, on the other hand, conducted pre-COVID proceedings in person, and the quick shift to remote proceedings has proven difficult for many to implement.
Second, arbitration is a highly flexible procedure that both parties and the arbitrator can tailor to address any problems that crop up. In late March and early April, with the legal system in disarray and courts across the nation shuttering, one of the authors participated in several preliminary teleconferences with arbitrators in matters pending before the AAA and JAMS. The parties simply agreed that arbitration would proceed on a normal, expedited time frame and that the final hearings—some scheduled for less than six months hence—would be conducted via Zoom. Such instant flexibility is not typically available in a courtroom, where judges and parties are often bound by inflexible rules, disdain for technology, and prejudice against nontraditional methods. Indeed, in one of the few in-person jury trials set to occur in Texas, an unsympathetic judge in a multimillion-dollar property-tax dispute refused an at-risk attorney’s plea for a continuance, forcing the lawyer to appear via Zoom while everyone else—judge, jury, opposing counsel, witnesses—will appear in person.
As arbitrators and parties were tailoring their own arbitration proceedings, meanwhile, domestic and international arbitral bodies such as the AAA, JAMS, International Chamber of Commerce, and the London Court of International Arbitration issued guidance for all parties and their arbitrators, just days into the pandemic, on how to conduct remote hearings. Courts, while quick to suspend proceedings, adapted to videoconferencing technology far more slowly, and have still not uniformly resolved (if at all) how they will resume trials.
Such instant flexibility is not typically available in a courtroom, where judges and parties are often bound by inflexible rules, disdain for technology, and prejudice against nontraditional methods.
Third, long before Zoom was commonplace, parties and arbitrators were familiar with presenting their claims via videoconference or other means, so conducting the entire final hearing this way is a relatively small step to take. In previous arbitrations long before the pandemic, one of the authors has presented witness testimony via the AAA’s clunky video conferencing equipment (thank goodness for Zoom), by videotape, by telephone, and even by affidavit. These methods alleviate many of the practical problems of obtaining testimony in the era of COVID-related travel restrictions, and arbitration’s flexible rules of procedure ensure that the evidence will be admissible. The same can by no means be said of typical court proceedings, where the parties are bound by strict rules of evidence that would exclude much of the evidence admitted in arbitration.
Finally, arbitrators—who must advance the arbitration to receive their paycheck—have an incentive to keep cases moving to the final hearing regardless of what is going on in the world outside. Judges have no such incentive.
Being sure to include arbitration clauses in contracts, then, will help American companies ensure that their disputes will be expediently adjudicated in a tried, tested forum immune from the effects of a pandemic or anything else. This benefit, combined with the elimination of practical and logistical hurdles in international litigation, should make arbitration the preferred forum for any company engaged in international business.
Ashish Mahendru is a Houston trial lawyer and firm founder of Mahendru P.C. Since opening the firm in 2001, Mr. Mahendru has successfully represented clients in a broad range of cases in both state and federal courts. His practice focuses on business and commercial disputes, energy, construction, employment, securities, trade secrets and real estate cases. For more information about Mr. Mahendru, visit www.thelitigationgroup.com.
Darren Braun is an experienced trial attorney who focuses his practice on litigating partnership and shareholder disputes, bet-the-company trade secret fights, and non-competes. He also has successfully obtained and defended countless temporary restraining orders and temporary injunctions. His ability to know when and how to fight the litigation battle has earned him both trust from clients and industry recognition from his peers. In 2018, Mr. Braun was named a Texas Rising Star for his work in litigation.