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Arbitration and the New York Convention: an Alternative Route to Complex Litigation in a Globalised Climate

164 countries are parties to an international treaty named “Convention on the Recognition and Enforcement of Foreign Arbitral Awards”. This treaty, more commonly known as the New York Convention, appears on its face to be a dense legalistic document with no significant importance. However, despite its deceptively dull appearance, the New York Convention has had and will continue to have a huge impact on modern cross-border business activities.

In a globalised economy with cross-border legal transactions being prevalent in virtually every field of commerce, disputes arising out of these relationships have become ‘globalised’ as well. The traditional ‘national’ setting in which one party seeks to resolve a dispute in the comfort of its own language, culture and system of law, is being challenged where the parties are residents (if people) or registered (if companies) in different countries. Such a dispute can and often does become even more complicated where the contract of the parties relates to obligations to be performed in a third country, with relevant evidence located in a fourth country.

Litigating in another country can be daunting. The bureaucracy of some national courts and the perceived disadvantage of “playing away” cause parties to think twice before commencing proceedings in another country. In addition, there are sometimes complex legal questions about which court has jurisdiction and which law applies.

This is when the added value of international arbitration comes into play. Bypassing many of the difficulties of national courts, parties to cross-border disputes increasingly come to appreciate the relative simplicity of this alternative mechanism, both in theory and in practice.  Not bound by local court procedures, entirely consensual, and largely free from pompous formalism, international arbitration provides an agile, controllable and flexible platform for dispute resolution, especially where more than two countries are central to the dispute. The idea that justice can be privatised, remain confidential and is therefore arguably more efficient, appeals to actors in the fast-paced business world. Parties are also attracted by their ability to select their own arbitrators, together with the governing law and procedure.

Enforcing Arbitral Awards

These notable advantages of international arbitration have become well-known within the global business community. However, while the characteristics of confidentiality, speed, neutrality and flexibility have all shaped the image of international arbitration as fresh and enticing, its greatest advantage is without doubt the uniform, straightforward procedure for recognising and enforcing arbitration judgments (“arbitral awards”) around the world.

Enforcement is the building block of any domestic or international legal system. It underlies the very legitimacy of the system; in the absence of proper enforcement, international arbitration would have failed, swiftly losing its practical relevance. Similarly, a convoluted, excessively-legalistic enforcement process, exhausting parties’ time and money, will have steadily driven this mechanism to obscurity, rendering all the other values and benefits of arbitration of only academic interest. This is why the New York Convention lies at the heart of the international arbitration system.

The Convention requires each of its 164 countries to “recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon”. Those countries cannot impose higher fees or other conditions that make the recognition or enforcement of the foreign award substantially more onerous than that of a domestic arbitral award. Furthermore, save for some limited exceptions set out in Article V of the Convention, the party applying to enforce the award in any of those 164 countries is to be met with minimum obstacles and with no interference by the domestic courts.

The Value of Arbitration for Anglo-Israeli Disputes

Crucially, and somewhat counter intuitively, enforcement of an international arbitration award is in most, if not all, countries simpler and quicker than the enforcement of a foreign court judgment. It is reasonable to assume that a court judgment given in country A can and should enjoy a smooth path for recognition and enforcement in country B, when both countries are democracies, maintaining friendly relations and have similar legal systems. Following this logic, one would expect a court order made in the High Court of England and Wales to be recognised and enforced in Israel with minimal effort, given that both countries are developed, modern democracies, with a respectable diplomatic relationship and a robust legal system based on English common law. One would also expect an award given by a private individual (the arbitrator), who makes his judgment alone, with no appeal process and without the ensured fairness and other safeguards of the English Civil Procedure Rules to be more difficult to enforce.

However, the reverse is true. Recognition and subsequent enforcement in Israel of a judgment made in the English Courts is subject to a statutory, multi-layered test. Under the relevant Israeli legislation, the Enforcement of Foreign Judgments Law 1958, a party wishing to enforce an English judgment or order must prove certain facts relating to its status. In particular, that party will have to prove that the following conditions have been satisfied:

  1. That the court in England giving this judgment or order had authority to do so under English law;
  2. That the judgment or order in question is not appealable;
  3. That the obligation in the judgment or order in question is practically enforceable in Israel, and its content is not contrary to public policy;
  4. That the judgment or order in question is enforceable in England;
  5. That England recognises and enforces Israeli judgments and orders.

Being cumulative conditions, a party might experience difficulties in trying to prove all of the above, and may have to incur substantial costs in doing so. A hearing on this matter is also likely to require an expert in English law, and one can expect the costs to be even higher where the country in which the judgment or order was given is more remote and less accessible than England.

In stark contrast, an arbitral award made by an arbitrator in England in a similar type of commercial case will be easily recognised and enforced in Israel by virtue of Israel being a party to the New York Convention.

An Illustrative Case:

  • A company registered in Israel makes a claim for a breach of contract against a company registered in England. There is a clause in the contract stating that it shall be governed by English law, and that any dispute is subject to binding arbitration, conducted by one arbitrator, and held in London.
  • The English company has liquid assets in Israel, Morocco, Panama, Japan and Sweden.
  • An arbitral award was given ordering the English company to pay damages to the Israeli company for breach of contract, but the English company is unwilling to comply with the award, regarding it as unfair.

In such a scenario, the arbitration route agreed on in the contract enables the Israeli company to have this award recognised and enforced in 164 countries, including all those countries mentioned above in which the English company has assets. This makes the Israeli company’s life significantly easier than it would have been had an English domestic court given an identical judgment. The choice of international arbitration, therefore, promises not just an additional measure of neutrality for the Israeli company but also – at least as far as enforcement is concerned – a good measure of procedural economy.

In 2018 White & Case and Queen Mary University of London published a comprehensive survey on international arbitration titled “The Evolution of International Arbitration”.[1] 97% of the respondents to the survey indicated that international arbitration is their preferred method of dispute resolution, and 64% of the respondents indicated that the most valuable characteristic of international arbitration is “enforceability of awards”, making it the most frequently selected option.[2] These findings further demonstrate that the traditional dependency on domestic courts is gradually eroding, and that the effectiveness of the New York Convention has led cross-border actors around the world to understand that their interests are generally better fulfilled when one of their seemingly-redundant boilerplate clauses provides for the arbitration route.

[1] For the full report see http://www.arbitration.qmul.ac.uk/media/arbitration/docs/2018-International-Arbitration-Survey-report.pdf

[2] Ibid., pages 5 and 7.

 


Article Written by: Tomer Treger

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