Commercial Arbitration

International Arbitration Institutions Compete for Business

The three major international arbitration institutions, fiercely competitive with the courts, are—as it turns out—just as fiercely competitive amongst themselves.

Like law firms, the International Court of Arbitration of the International Chamber of Commerce (ICC), International Dispute Resolution Centre of the American Arbitration Association (ICDR), and London Court of International Arbitration want to be innovative to satisfy corporate counsel who seek efficiency and cost effectiveness. Each of the institutions is looking for ways to get out of the gate first, and those who don’t tend to copy the leaders. While all three sets of international arbitration rules contain many similar provisions, there are differences both in their innovations and in some of their traditional rules, including the deemed start date for an arbitration; the default deadline for response; the default number of arbitrators; the default appointment of arbitrators; the default restrictions on arbitrators where the parties are of different nationalities; the time limits for challenging arbitration; joinder; consolidation; the tribunal’s discretion to order interim measures; confidentiality; the time limit for issuing awards; expedited and summary procedures; availability of an emergency arbitrator; and cost allocation among the parties.

The ICC is known for its heavy dose of quality control and its efficient processing of issues at the front end; although, there is some variation in the quality of the organization’s arbitrators. The ICDR posts hourly rates for its arbitrators, while the ICC provides a range within which the arbitrators will be paid, with the final determination based on the efficiency of the arbitration as determined by the ICC. The upshot is that the ICDR is relatively inexpensive while the ICC is relatively expensive. In 2013, the ICC, facing a shrinking percentage of cases from North America, opened a New York office to serve the Canadian and US international arbitration markets.

Arbitrators Enforcing Local Remedy First Provisions

Canadian lawyers have long been familiar with the domestic principles of administrative law that require parties to exhaust their administrative remedies before resorting to appeal or judicial review. As it turns out, international law has a similar principal embodied in the “Local Remedy First” (LRF) provisions found in Bilateral Trade or Investment Treaties (BITs).

Under the ICSID Convention, which Canada ratified in late 2013, becoming the 150th state to do so, signatory states may require parties to exhaust local administrative or judicial remedies before taking advantage of the arbitration provisions in a treaty. Historically, however, arbitral tribunals have tended to downplay LRF clauses, treating them as procedural obstacles curable by a variety of means, rather than jurisdictional conditions precedent.

That has changed of late. Tribunals have put practical teeth into the characterization of LRFs as conditions by taking a stricter view of two of the most common avenues that claimants rely on to justify non-compliance: “Most Favored Nation” (MFN) clauses and the “futility” argument that resort to the local system would be pointless.

The MFN argument (which of course applies only when the treaty in question contains such a clause) seeks to import less burdensome arbitration provisions from the host country’s (the one the investor is claiming against) arrangements with another nation. The theory is that the investor, being from a most favoured nation, has the right to the most favourable conditions surrounding arbitration that the host country has granted to any other state. On this view, which arbitrators have in the past commonly accepted, the LRF provisions are deemed not to apply.

Similarly, while arbitrators have tried to limit the futility argument, the approaches have been inconsistent, so much so that the barest allegations of futility have sufficed to circumvent LRFs.

The trend toward treating LRFs with more significance, however, is evidenced by the recent decision in Kilic Insaat Ithalat Ihracat Sanayi v. Ticaret Anonim Sirketi v. Turkmenistan, which engaged a BIT between Turkey and Turkmenistan that contained both LRF and MFN provisions. The Turkish claimant, Kilic, unsuccessfully sought to avoid the LRF by relying on both the MFN and futility arguments.

As the ICSID tribunal saw it, allowing the MFN argument merely because many of Turkey’s other BITs lacked LRFs meant that the LRF clause in the Turkey–Turkmenistan agreement would have been largely redundant from the moment the parties agreed to insert it. It is noteworthy, however, that the tribunal also found that the two countries did not likely intend that the MFN clause applied to the treaty’s dispute settlement provisions.

As for the futility argument, the tribunal had no heed for Kilic’s simple pleas that resort to Turkmenistan’s local tribunals and courts would have been futile. Rather, in what some commentators have called the narrowest interpretation of the futility test to date, the tribunal held that Kilic had to establish futility by presenting specific evidence of its applicability to issues, the parties, and the matters in dispute in the particular case. Studies or reports about the general inadequacies of the Turkmen system were insufficient. Absent such evidence, the fact that Kilic had failed to demonstrate that it had made efforts to comply were fatal to its case.

What remains to be determined is whether Kilic will, for the most part, be restricted to its facts. Commentators are saying that’s not likely.


Practice Area(s):