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Arbitration in International Computer Contracts

Attorneys who prepare international agreements face problems regarding resolutions of disputes which are not encountered in transactions confined to one country. When contemplating the prospect of disputes arising from a domestic transaction, each party has the comfort of knowing that any litigation will take place in a language and legal system with which it is familiar.[1] In contrast, each party to an international transaction must consider the prospect of being forced to litigate in an unfamiliar judicial system, in a foreign language, and with the proceedings conducted thousands of miles from its home office. It is also much more difficult to predict the effect of critical contract provisions, such as warranty disclaimers and limitations on damages, when it is not known at the time the contract is entered into which country’s substantive law will be applied.[2]

Since these concerns are felt more or less equally by both parties, it has become common practice for international contracts to provide that disputes will be resolved by arbitration. Arbitration allows the parties to select arbitrators, procedural rules and substantive law which do not favor either side, and to select a site for the proceedings which is equally convenient (or inconvenient) choices which cannot be made for litigation. Many practitioners also believe that the relative informality of arbitration proceedings, and the ability in many cases for the arbitrators to act as conciliators (” amiable compositeurs “) encourages quick resolution of disagreements with a minimum of damage to the business relationship.

However, there are many obstacles to achieving a predictable, neutral and efficient arbitration process. The benefits of using arbitration cannot be obtained if one party can force the dispute back into the courts of its home country, or if the arbitration decision cannot be enforced. Unfortunately, it is common for contract provisions dealing with dispute resolution to receive little attention during negotiations, as the parties understandably concentrate on the business aspects of the transaction. As a result, a standard arbitration clause, promulgated by one of the arbitration agencies discussed later in this article, will be inserted at the last minute, or the agreement may state only that disputes will be settled by arbitration. Such clauses will not necessarily consider the many issues which must be covered if the arbitration is to take place, and if the arbitration decision, once rendered, is to be final, binding and enforceable. This article will explain the operation of the major agencies and treaties which create the framework for international arbitration, and provide guidance for preparation of contract clauses which use that framework to implement workable arbitration procedures.

Who Governs the Process: Arbitration Agencies

To facilitate arbitration, agencies, sometimes called “institutions” or “associations,” have been established in many major countries. These organizations typically issue a set of standard rules for the conduct of arbitration, which the parties can incorporate into their contracts by reference. The organizations also provide services such as maintaining lists of experienced arbitrators for selection by the parties, appointing the arbitrators when the parties cannot agree, and furnishing administrative services such as arranging for rooms for conducting the hearings, obtaining stenographers, and receiving and distributing the arbitrators’ fees.[3]

In the United States, these services are provided by the American Arbitration Association (“AAA”), with principal offices at 140 West 51 Street, New York, New York 10020-1203. The AAA has regional offices in many major cities. Besides administering arbitration under its own rules,[4] the AAA will enable arbitration to be conducted in the U.S. under other rules, by administrating the proceeding (acting as “administrator”) or in the limited role as “appointing authority” (appointing arbitrators if the parties so choose, or cannot agree). The AAA maintains a library of materials on dispute resolution, and is a valuable source of information and education about arbitration.

In the international arena, the best-known agency is the Paris-based International Chamber of Commerce (“ICC”), acting through its Arbitration Court.[5] The term “Court” may be confusing, since this arm of the ICC is an administrating and appointing agency analogous to the AAA. However, the Court must approve any awards issued under its procedures.

In dealing with Latin America, services can be provided by the Inter-American Commercial Arbitration Commission (“IACAC”).[6]

The AAA has reciprocal agreements with the domestic arbitration agencies of many other countries. These agreements, while limited in scope, can resolve some troublesome issues. For example, the agreement between the AAA and the Japan Commercial Arbitration Association (“JCAA”) establishes joint commissions in the U.S. and Japan, which will determine the place for arbitration proceedings if the parties cannot agree.[7]

The Rules Which Govern Arbitration

Some contracts specify that disputes are to be resolved by arbitration, but do not select the rules of or furnishing of services by any arbitration agency. This is known as ” ad hoc ” arbitration.[8] Since this method requires the parties to agree on complicated issues at a time when the relationship is less than friendly, it is advisable to specify a set of rules for the proceedings as well as an appointing or administering agency. It is also possible for the parties to negotiate their own set of rules and incorporate these into the contract, but this is obviously a time-consuming process.

Most arbitration agencies promulgate sets of rules for the arbitrations they administer.[9] In addition, the United Nations Commission on International Trade Law has prepared the UNCITRAL rules.[10] In order to accommodate the interests of all U.N. members, the UNCITRAL rules are designed to permit their use in ad hoc arbitration, rather than being associated with the use of a particular agency. However, the rules also permit the use of an arbitration institution such as the AAA as an appointing or administering authority.

The choice of rules should be an informed decision. The following examples illustrate some of the differences between the widely-used AAA, ICC and UNCITRAL rules.[11] In most cases, the rules maybe varied by agreement in the contract or at the time of arbitration, so it is possible, if both parties can agree, to tailor the selected rules to the requirements of a particular transaction:

Selection of Arbitrators. Under the AAA and ICC rules, one arbitrator is the norm, while the UNCITRAL rules specify a three-person panel.[12] However, the parties may change these numbers by agreement.[13] The process for selecting the arbitrators are quite different under the various rules. Under the UNCITRAL and ICC rules, the arbitrators must be agreed upon by the parties, with the decision being referred to the appointing authority if the parties cannot agree.[14] In an AAA proceeding, the AAA first proposes a list of qualified arbitrators. Each party may strike any number of candidates from the list, after which the arbitrator is selected by the AAA from the remaining candidates.[15]

Procedures. The AAA, ICC and UNCITRAL rules all provide for counterclaims.[16] The AAA rules also permit the submission of “new or different” claims after the initial claim is filed, but require the arbitrators consent if such claims are filed after the arbitrator is appointed.[17] The AAA rules, but not the ICC or UNCITRAL rules, allow the arbitrator to exercise subpoena powers.[18]

Choice of Law. The AAA Rules do not cover the choice of substantive law to be used by the arbitrators in making the award. The UNCITRAL and ICC rules require the application of the law selected by the parties, or if none was selected, the arbitrators are to apply the conflict of laws rules which they consider applicable.[19]

Provisions governing the award . The AAA rules require the arbitrators to render an award within thirty days after the close of hearings.[20] The ICC rules require the award to be made within six months of the start of the proceedings,[21] but the Court of Arbitration must still approve the award.[22]

The AAA rules do not specify that the award is “final and binding”.[23] This may be important under international conventions for the enforcement of arbitration awards, which allow courts to refuse enforcement of an award that has not become binding.[24] The AAA rules, unlike the UNCITRAL and ICC rules, do not contain a specific provision for the confidentiality of the award.[25]

Arbitrators’ fees . One factor which offsets the supposed cost advantage of arbitration is that the arbitrators, unlike judges, must be paid by the parties to the arbitration. Typically, arbitrators will be paid for “study days” spent examining the case file as well as for attendance at the hearings. AAA arbitrators will serve without fee for short proceedings, but the AAA rules contemplate payment of a fee for prolonged matters, to be determined by the parties or the AAA.[26] The ICC rules have a specific fee schedule, based on a percentage of the amount in dispute.[27] The UNCITRAL rules allow the arbitrators to fix their fee, with reference to the appointing authority’s fee schedule.[28]


The most serious mistake in using an arbitration clause is the failure to consider whether and how it can be enforced. Two issues arise: First, can the agreement to arbitrate be enforced if one party seeks instead to litigate a dispute in court? Second, if arbitration occurs, will the arbitrator’s award be enforced by the courts? To answer these questions, it is necessary to examine the relevant law and international treaties of the countries of each party to the agreement, and of the country where the arbitration proceedings are conducted.

Agreements to arbitrate have not always been well-regarded by the courts, who looked upon such arrangements as usurping the function of the judicial system. As a result, it was generally not possible to compel a party to specifically perform an agreement to arbitrate a dispute. In the United States, this rule has been substantially overturned. Many states have enacted statutes which make arbitration clauses valid, enforceable and irrevocable,[29] and the Federal Arbitration Act [30] does the same at the federal level. It should not be assumed that the arbitration clause in a contract is necessarily enforceable, without checking the law of the country or countries where specific performance of the clause would be sought.[31]

Even more care is needed to ensure that an arbitral award, once rendered, can be enforced. Although the defendant’s country may recognize and enforce agreements to arbitrate, it does not automatically follow that its courts will enforce a particular arbitral award, particularly if the award was made in a proceeding occurring outside that country’s borders.

To analyze whether the award will be enforceable, the first step is to examine relevant international treaties. The major treaty is the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted by the United Nations Conference on International Commercial Arbitration.[32] Over 60 countries, including the United States, have become parties this Convention.[33] Essentially, the Convention requires each country to recognize and enforce any arbitral award (1) made in any other country which is a party to the Convention, or (2) which is rendered in the country where enforcement is sought, but which is not considered as a “domestic” award; for example, because the parties applied the law of another country to the proceedings.[34] The treaty also requires the courts of each party to specifically enforce agreements to arbitrate.[35]

The Convention contains many traps for the unwary. First, note that it makes enforcement of an award dependent on the award having beenmade in a country which is a party to the 1958 Convention, regardless of the home countries of either party to the arbitration.[36] Thus, if the arbitration clause selects a “neutral” country as the place for arbitration, it must be ascertained whether that country, as well as those of the parties to the contract, is a party to the 1958 Convention.

Second, the Convention permits each country to adopt it with certain exceptions, such as limiting its effect only to awards made in the territory of another country, or only to “commercial” disputes.[37] Such limitations then apply reciprocally[38]: If country A adopts the Convention with limitations, country B’s obligations with respect to country A are similarly limited.

Third, the Convention contains a detailed list of grounds on which enforcement of the award may be challenged.[39] To summarize briefly, these include challenges to the validity of the original agreement to arbitrate, defects in the procedures used in the arbitration, and lack of binding effect of the award in the country where it was rendered.[40] Most troublesome is a provision which allows the court to refuse enforcement of the award if it finds that recognition or enforcement would be contrary to the public policy of the country where enforcement is sought. This raises the possibility that even though the parties have selected a different country’s substantive law to govern the agreement, the court may refuse to enforce an award based on public policy underlying the law of the court’s country.[41]

Fourth, it is important to investigate whether a country which is party to the Convention is a federal or called “non-unitary” state. If so, the constituent states of the country may not be bound to take legislative action to implement the Convention.[42] Broadly speaking, this means that the Convention cannot be relied on as a basis for enforcement unless jurisdiction can be obtained in a court at a governmental level (federal or state) which has implemented the Convention by legislation.

Having determined that the relevant countries are parties to an appropriate treaty, it is then necessary to examine the law of each country to determine whether and how the treaty has been enacted into positive law. The 1958 U.N. Convention has been implemented in the United States by chapter 2 of the Federal Arbitration Act.[43] This chapter grants jurisdiction of actions under the Convention to the federal district courts, regardless of the amount in controversy.[44] It also requires actions under it to be brought within three years after the arbitral award.[45]

Drafting the Arbitration Clause

Supplementing the standard clauses . Arbitration agencies generally provide standard contract clauses to provide for arbitration of disputes under the agency’s rules. However, such clauses usually do little more than state that the agency’s rules are to be used and that the arbitrator’s decision may be enforced by judicial process.

Most arbitration rules allow many important provisions to be varied by agreement of the parties. Thus, an attorney who carefully negotiates an arbitration clause may be able to swing critical issues in favor of his or her client.

Scope . The most important part of an arbitration clause is the specification of the scope of issues to be resolved by arbitration. If the goal is to stay out of court, the clause should clearly establish that all controversies, even those regarding whether the contract itself is valid, are to be determined by arbitration.[46]

Substantive law. Deciding on the substantive law to be applied often requires creativity by the negotiators. The compromise may lie in avoiding a choice of law, and requiring the arbitrators to look instead to the language of the contract, trade usage and/or “principles of natural justice”. Another alternative is to specify that the law of the defendant’s or plaintiff’s country (inclusive or exclusive of its choice of law provisions) will control.

Location . The location of the proceedings is critical to the ease -or difficulty- that will be created for each party. If the parties do not specify the location, many rules require the arbitrator to make the choice. While this may be a neutral way to select the site, it should be expected that the arbitrator will select a site convenient for him or her. As discussed above, it is advisable to locate the proceedings in a country which is a party to the 1958 U.N. Convention.

Language . The language of the proceedings should be specified.

Number of arbitrators . The number of the arbitrators and the method for their selection is generally provided for in the rules. If the UNCITRAL rules are used, significant delays may be encountered if the parties cannot agree on an arbitrator, unless an appointing authority has been designated in the contract. An administering authority should also be specified for the UNCITRAL rules.

Time limits . Time limits for various actions are specified in most rules. If the parties are crafting their own set of rules in the contract, attention must be paid to issues as the length of time each party has to select arbitrators, and the length of time after the close of hearings or submission of documents within which the arbitrators must issue an award.

Interim relief. If particular forums of preliminary relief are to be available, specific provisions should be included in the contract. This can be a vital issue to a party who is providing proprietary information to the other, and needs to be able to obtain injunctive relief against improper disclosure.

Other provisions. Some less typical provisions include specifying the currency in which monetary awards will be paid, requiring that the parties attempt to resolve the dispute by friendly negotiations as a condition precedent to arbitration, and imposing interest on delayed payments of awards.[47]


Arbitration provides a method of dispute resolution which can be tailored to the needs of the parties to international transactions. However, attorneys must carefully investigate international treaties and foreign laws to ensure that the agreement to arbitrate, and the arbitral award, once rendered, will be recognized and enforced. The attorney with a thorough understanding of the operation of available bodies of arbitral rules and the nuances of relevant laws and international agreements will be in a position to negotiate workable procedures that will serve the clients best interests.


1. In a federal system such as the United States, there will be differences in the bodies of state law with which each party’s attorneys are most familiar. These differences obviously are much less than the differences between, for example, a common law and civil law country. In the case of uniform acts, such as the Uniform Commercial Code, U.C.C. I-3A U.L.A. (1977), the differences are usually minimal.

2. Each party will also be concerned that courts in the other party’s country will tend to favor the nationals of that country.

3. See e.g., American Arbitration Association, Commercial Arbitration Rules of the American Arbitration Association (1982) [hereinafter “AAA Rules”].

4. Id. The AAA has issued supplements to the AAA Rules for use in international arbitrations. American Arbitration Association, Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association (1982); American Arbitration Association, Procedures for Cases Under the UNCITRAL Arbitration Rules (1984).

5. Arbitration Court at the International Chamber of Commerce, 38, Cours Albert I, 75008, Paris, France.

6. The IACAC office of the Treasurer and General Counsel is located at 1819 H Street, N.W., Room 310, Washington, D.C. 20006.

7. AAA, Agreement Between the Japan Commercial Arbitration Association and the AAA to Facilitate the Use of Commercial Arbitration in Trade between Japan and the U.S.A. (September 16, 1952). In order to utilize the AAA-JCAA agreement, the AAA recommends the following contract clause “All disputes, controversies, or differences which may arise between the parties, out of or in relation to or in connection with this contract, or for the breach thereof, shall be finally settled by arbitration pursuant to the Japan-American Trade Arbitration Agreement, of September 16, 1952, by which each party hereto is bound.” The Japanese-American Arbitration Agreement specifies that the arbitration rules to be applied will be those of the arbitration association (AAA or JCAA) of the country where the proceedings are held.

8. The term ad hoc is also used to describe arbitration conducted by mutual agreement when the contract does not specify arbitration of disputes.

9. See,e.g ., AAA Rules; International Chamber of Commerce, Commercial Rules of Conciliation and Arbitration (ICC Publication 291, 1975) [hereinafter “ICC Rules”].

10. United Nations, UNCITRAL Arbitration Rules (1977) [hereinafter “UNCITRAL Rules”].

11. AAA Rules; ICC Rules; UNCITRAL Rules.

12. AAA Rules, § 17; ICC Rules, art. 2(5); UNCITRAL Rules, art. 5.

13. AAA Rules, § 17; ICC Rules, art. 2(2); UNCITRAL Rules, art. 5.

14. UNCITRAL Rules, arts. 5-7; ICC Rules, art. 2(3). Under the UNCITRAL Rules, in the absence of an appointing authority, the decision is referred to the Secretary-General of the Permanent Court of Arbitration of the Hague. UNCITRAL Rules, arts. 5(2), 7(3).

15. AAA Rules, § 13.

16. AAA Rules, § 7; ICC Rules, art. 5; UNCITRAL Rules, art. 19(3).

17. AAA Rules, § 8.

18. Id ., § 3.1

19. UNCITRAL Rules, art. 33; ICC Rules, art. 13(3).

20. AAA Rules, § 41.

21. ICC Rules, art. 18(l).

22. Id. , art. 21.

23. Compare ICC Rules, art. 24 with UNCITRAL Rules, art. 32(2). However, the AAA Rules provide that the parties to arbitration under the rules are deemed to have consented to judgment upon the award being entered in any Federal or State court “having jurisdiction thereof “. AAA Rules, § 47(c).

24. See, e.g. , Recognition and Enforcement of Foreign Arbitral Awards, 21 U.S.T. 2517, T.I.A.S. No. 6997 [hereinafter “U.N. Convention”].

25. UNCITRAL Rules, art. 32(5). ICC Rules, art. 23(2).

26. AAA Rules, § 51.

27. ICC Rules, app. III.

28. UNCITRAL Rules, arts. 38, 40.

29. See, e.g. , Uniform Arbitration Act, 9 U.L.A. 1 (1955).

30. 9 U.S.C.A. § 1-208 (West Supp. 1986).

31. While a country may be party to a treaty which calls for the enforcement of agreements to arbitrate, see, e.g. , U.N. Convention, the question of whether the treaty has been enacted into positive law must be considered. See infra note 33.

32. U.N. Convention. For dealing with Latin American countries, the major treaty is the 1975 Inter-American Convention on International Commercial Arbitration. International Council for Commercial Arbitration, 3 YEARBOOK COMMERCIAL ARBITRATION 15 (1978). There are also many other bilateral and multilateral treaties on arbitration in force between many countries.

33. U.N. Convention. The text of the treaty may also be found in the note after 9 U.S.C.A. § 201 (West Supp. 1986). The reader should consult this note for a list of countries which have signed the treaty, and the exceptions they have asserted.

34. U.N. Convention, art. I(1).

35. Id ., art. II.

36. Id ., art. I(1).

37. Id ., art. I(3).

38. Id .

39. Id ., art. V.

40. The U.N. Convention states that recognition and enforcement “may” be refused if the party against whom the award is to be enforced “furnishes” proof of the listed grounds. Id. , art. V(l). It is not specified what degree of proof must be offered, or whether the court has discretion to enforce the award despite such proof being furnished.

41. Id ., art. (2)(b). Considerable complexity may be introduced where public policy is expressed both in national law and in multinational arrangements such as the antitrust provisions of the treaty establishing the European Economic Community. Treaty Establishing the European Economic Community, March 25,1957, arts. 85-94, 298 U.N.T.S.11. Such treaty provisions in turn may be implemented differently in each country that is a party to the treaty.

42. U.N. Convention, art. XI.

43. 9 U.S.C.A. §§ 201-08 (West Supp. 1986).

44. Id ., § 203.

45. Id ., § 207.

46. The AAA recommends the following: “Any dispute, controversy or claim arising out of or relating to the contract, or the breach, termination or invalidity thereof, shall be finally resolved by arbitration.” An explicit renunciation of judicial review may be useful, as may a provision that the arbitrators have the power to rule on their own competence.

47. Detailed discussions of the contents of arbitration clauses can be found in Asken, “Drafting Arbitration Clauses in International Agreements”, inARBITRATION IN THE LICENSING PROCESS 1-3 (R. Goldscheider ed.1984), and Ehrenhaft, “Arbitration Clauses in Transnational Contracts”, in ALI-ABA RESOURCE MATERIALS: INTERNATIONAL TRADE FOR THE NONSPECIALIST 2675 (3d ed. 1984).