As commerce becomes increasingly internationalized, the need for reliable methods of international dispute resolution is increasing. While the costs and risks of litigating at home may be unpalatable, it is more attractive compared to litigating in the courts of a foreign-based trading partner. Fortunately, there is another option. In politically unstable regions of the world, prudent U.S. businesses have the option of utilizing reliable, fair and cost effective mechanisms for resolving disputes with foreign counterparties.

This article explores the extent to which international arbitration—either contractual or pursuant to treaty—offers material value to a U.S. business investing abroad, specifically relating to increased commercial security and more effective political risk management.

The troubling "3 a.m. questions"
The "what happens if?" questions are the ones likely to keep a CEO awake during the night. Questions such as, what if:

• my counterparty fails to honor its obligations?
  
  
• I am subject to foreign government pressure, whether on restrictions concerning withdrawal of profit on investment, currency restrictions, discriminatory treatment compared to that of nationals of the relevant country or, in the most extreme case, expropriation of assets?
  
  
• I commence court proceedings in the courts of my counterparty where the average duration to trial is seven years?
  
  
• the judges in the courts of my counterparty are instinctively, or as a result of undue influence, biased against foreign parties?
  
  
• I am comfortable with the courts in the country where I am investing, but the assets of my counterparty are in a third country, where I am less comfortable that my rights will be protected?
  
  

International arbitration has much to offer in assuaging these concerns.

Securing an impartial forum
The fear of bias in a foreign counterparty's home court can be ameliorated to some extent contractually by inclusion of a well-drafted arbitration clause. Through this mechanism contracting parties may select a neutral and impartial forum so that any dispute will be resolved by a tribunal composed of individuals in whom confidence is vested (see the rules of arbitration institutions such as International Chamber of Commerce (ICC) Rules, Article 7(1), London Court of International Arbitration (LCIA) Rules, Articles 5.2 and 6, American Arbitration Association (AAA) Rules, Article 7 and United Nations Commission on International Trade Law (UNCITRAL) Model Law Article 12).

The most common tribunal selection mechanism includes a clause providing for a tribunal of three persons, one selected by each party with the chair selected by the parties' nominated arbitrators or, in default, by an independent appointing body (see UNCITRAL Articles 10 and 11, AAA Article 6, LCIA Article 5 and ICC Article 9).

Most institutional arbitration rules provide that all tribunal members must be independent and neutral. It is often assumed, incorrectly, that a party's nominated arbitrator is that party's "man" or "woman." In fact, all tribunal members following confirmation ethically owe the same duties to all parties, although a party nominee may help ensure that fellow tribunal members understand the nature of the case put by his or her nominating party. Any attempt to go beyond such a role and to actively advocate the case of the nominating party within the tribunal room, is likely to characterize that arbitrator as partial and reduce credibility and effectiveness. It is therefore important to select an arbitrator who is unbiased but, who by reason of prior experience, has the confidence of the nominating party on determinative issues.

The final key element of a contractual arbitration clause is selection of an appropriate "seat" or place of arbitration. Because the seat determines the procedural law and court that will support the process and be the place of challenge of the award, it is essential that the seat is in a country with a well-established history of respecting arbitration as a form of dispute resolution, one underpinned by both robust arbitration legislation such as the UNCITRAL Model Law and a judiciary hospitable to arbitration. The latter point is pivotal.

In a country where rapid development has driven economic expansion, even though the government may have adopted the UNCITRAL Model Law and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the "New York Convention), the judiciary may not have the experience properly to apply that law.

Decisions of courts in new Accession Countries to the EU, the countries of the United Arab Emirates (UAE) and perhaps most notably India, are examples in point. In Oil & Natural Gas Corporation Limited v. Saw Pipes Limited , the Supreme Court of India vastly expanded the scope of challenge to an arbitration award by enlarging—many commentators characterize it as distorting—the "public policy" ground for challenging an award. Thus, despite outward signs that the courts of a potential seat of arbitration are hospitable to arbitration, in selecting the seat, court decisions must be closely examined to determine whether due process and fairness are respected.

Enforceability as the cornerstone of commercial risk management
In general terms, the ability to collect on an arbitral award is one of the strengths of arbitration. This fact stems from the wide acceptance and application of the New York Convention, which now has been ratified by 138 countries. Some ratifications carry one of the two permissible caveats, relating to commercial dealings, or requiring reciprocity between the country where enforcement will occur and the place where the award was made.

Generally speaking, parties find it easier to enforce arbitration awards than court judgments, because the network of reciprocal enforcement treaties for court judgments is more restricted. Where the arbitration award carries the additional endorsement of a well-regarded arbitral institution such as the International Chamber of Commerce, the London Court of International Arbitration, the International Centre for Dispute Resolution (ICDR) or the Stockholm Chamber of Commerce (SCC), enforcement is aided.

The United States has signed two international conventions authorizing the enforcement of foreign arbitration awards: the New York Convention and the Inter-American Convention on International Commercial Arbitration of 1975 (the "Panama Convention").

The New York Convention is codified in the Federal Arbitration Act and provides for mutual recognition and enforcement of arbitral decisions by signatories. The Panama Convention, which is also codified in the Federal Arbitration Act, is essentially a regional version of the New York Convention.

As indicated above, there continue to be problems in countries where arbitration is a less well-established concept. Either as a result of lack of familiarity by the judiciary or because of corruption/political or cultural bias, courts there have been unwilling to apply the enforcement mechanisms of the New York Convention.

A party seeking to enforce an award must supply to the court in the country in which enforcement is sought two documents: (1) the tribunal's award; and (2) the parties' arbitration agreement.

The New York Convention provides that compliance with these conditions prima facie entitles the prevailing party to judicial enforcement of the award. The opposing party may challenge judicial enforcement on several grounds, including (1) invalidity of the arbitration agreement; (2) violation of due process; (3) the arbitrator has exceeded his or her authority; (4) irregularity in the composition of the tribunal or in arbitral procedures; (5) the award is not binding in the country of origin; and (6) "public policy."

Depending on the identity or nature of the foreign counterparty, sovereign immunity also may be an important issue to address. In part as a result of the growth in investor-state arbitration awards (discussed below) there has been a host of recent court decisions across the world. A recent example is the English Court of Appeal decision in Svenska Petroleum Exploration AB v. Lithuania, AB Geonafta (EWCA Civ 1529, English App) relating to a $12.5 million arbitration award made against Lithuania in connection with an oil exploration joint venture.

Collecting on an arbitration award against a state may be difficult, but political repercussions of treaty-based arbitration claims have compelled countries to honor awards—obviating the investor's need to pursue collection through the courts. In contract-based arbitration claims the "commercial" nature of the endeavor undertaken by the state or state entity is an important element in enforcing the award. The manner in which a commercial venture is structured can play a key role in ensuring enforceability.

Controlling the dispute resolution process
The increase in the costs of litigation in the U.S. is mirrored, but to a lesser extent, in the growth of international arbitration during the last few years. It is debatable whether arbitration is as rapid and low cost as some maintain, but it is undoubtedly the case that if not carefully controlled by both the tribunal and the parties' counsel, the costs of arbitrations proceeding under the rules of the major institutions like theICC, LCIA, ICDR or SCC, can also be considerable. Effective lawyering at the contract stage and utilization of procedural devices at the hearing stage can make arbitration a more efficient and effective mechanism for achieving resolution of complex commercial disputes than traditional court litigation. Two such procedural mechanisms which can in the right cases be useful are witness conferencingand tribunal conciliation.

The starting point is to ensure that the arbitration tribunal is composed of individuals who are aware of such techniques, and who are willing to take the lead in driving them forward. Careful selection of the tribunal, particularly its chair, is central to achieving the desired outcome.

Under the rules of most of the major arbitration institutions and under most national state arbitration laws, including those of the U.S., the UK and of those countries that have adopted the UNCITRAL Model Law, there is of course party autonomy, but an experienced tribunal chair is often able by force of personality to encourage parties to utilize witness conferencing or tribunal conciliation.

Witness conferencing. Witness conferencing is a way to expedite the laborious and time-consuming courtroom method of presenting evidence of factual and expert witnesses. Instead of dealing with each witness sequentially through presentation of evidence in chief, followed by cross-examination, reexamination, and recross-examination, the arbitrator(s) deals with witnesses testifying on similar issues as a group. As a result, the process under which their evidence is taken differs markedly from that in a courtroom.

This technique, in the right hands and applied with appropriate safeguards to the right case, can deliver a just result more speedily and cost effectively. The technique is most commonly used when technical cases turn on the evidence of experts. With all experts of the same type in the hearing room at the same time arbitrators are able to "home in" on contentious issues faster as witnesses speak directly rather than posing questions through counsel.

Tribunal conciliation. Utilizing tribunal conciliation, a skillful tribunal chair can cause the parties to conduct a hard-headed assessment of the relative merits of their case without overstepping his or her ethical boundaries, thereby greatly enhancing the settlement success rate.

Strong traditions of tribunal conciliation are evident in China under the China International Economic and Trade Arbitration Commission (CIETAC) rules of procedure which included mandatory tribunal conciliation, and in the Germanic approach which flows from the far more interventionist approach adopted by German judges in domestic litigation.

Tribunal conciliation is not simply "mediation within arbitration," because the agent of conciliation (usually the chair) must retain the ability to operate impartially as the ultimate decision maker if the conciliation exercise proves unsuccessful. This means that the arbitrator(s) may not communicate on an ex parte basis with parties, or give the appearance of prejudging the eventual outcome.

Despite such limitations which are not present in a mediation, tribunal conciliation has proved to be extremely successful in achieving early compromise of disputes, particularly involving parties from regions of the world in which mediation has yet to achieve the level of acceptance that it has in the U.S.

How to access rights under treaties to achieve protection against political risk
Commercial arbitration typically is a creature of contract. In addition to or alongside contract-based arbitration parties may be able to utilize treaty-based arbitration (often referred to as "Investor-State arbitration"). Investor-State arbitration is a key means by which U.S. businesses investing abroad minimize political risk because it provides a route to make a claim directly against the host state, and is additional to any contractual rights.

Since the early 1960's western governments (including the U.S. and the UK) have promoted global development of investment opportunities for their nationals, through the establishment of Bilateral Investment Treaties (BIT's) and Multilateral Investment Treaties (MIT's), the most significant MIT being the North America Free Trade Agreement (NAFTA) and the Energy Charter Treaty ECT). Governments have sought to enshrine through BIT's and MIT's minimum levels of investor protection that operate as a safety net, thereby encouraging nationals to invest in regions of the world they might otherwise deem an unacceptably high political risk.

There are now approximately 2,500 BIT's in force, with states entering into new BIT's at a rapid rate, and also replacing existing treaties with new ones (some are intended to extend the level of protection afforded to investors and others to limit that protection). The U.S. is a party to 49 Bilateral Investment Treaties (based on information available from the United Nations Conference on Trade and Development (UNCTAD)).

Under a typical BIT, contracting states afford the nationals of another contracting state the following broad protections:

• protection against expropriation or measures equivalent to expropriation without prompt, adequate and effective compensation;
  
  
• a commitment not to take arbitrary or discriminatory measures adversely affecting the underlying investment;
  
  
• a right to fair and equitable treatment;
  
  
• a right to treatment no less favorable than that accorded to the nationals of the contracting state;
  
  
• "most favored nation" treatment (i.e., the contracting state may not treat investors from one state less favorably than those from another);
  
  
• the right to the free transfer of investments and returns; and
  
  
• full protection and security accorded by the contracting state to investments.
  
  

Investors have the ability to pursue claims against contracting states pursuant to The Convention on the Settlement of Investment Disputes between the States and Nationals of other States 1966 (the "Washington Convention").

The Washington Convention established the International Centre for Settlement of Investment Disputes (ICSID), which provides facilities for the arbitration of investment disputes between contracting states and the nationals of other contracting states. The ICSID jurisdiction extends to any legal dispute arising directly out of an investment between a contracting state (or sometimes a component part of a contracting state such as a province or a body performing a governmental function) and a national of another contracting state.

Entering into an investment contract: some tips
When entering into an investment contract it is important to:

• Check the availability of investor protection, including "umbrella" clauses, before entering into the contract (and not after a dispute has arisen). When determining the appropriate structure for a transaction, consider the investor protections that are potentially available in addition to other factors such as the tax implications, corporate governance requirements and funding consequences of that structure.
  
  
• Consider the types of dispute that may arise given the circumstances of the investment. This may influence which of the potentially applicable treaties is most attractive to an investor.
  
  
• Identify which treaty is applicable. Some investment treaties were entered into a number of years ago. Changes in the political landscape, such as the fragmentation or change in the name of a state, may mean that it is not immediately apparent which treaty is applicable. For example, the UK has entered into a BIT with the People's Republic of the Congo but not with the Democratic Republic of the Congo (formerly Zaire).
  
  
• Make it explicit contractually that the transaction constitutes an investment.
  
  
• Structure the transaction to meet as many of the features of an investment as possible, which will make it easier to surmount the jurisdictional hurdle involved in seeking ICSID arbitration.
  
  
• For added protection, where the investment status of a transaction is uncertain, consider combining an ICSID clause with a clause incorporating the rules of an arbitral institution that does not have the same jurisdictional requirements.
  
  

Expropriation bears fuller explanation. The classic case of expropriation is where the state seeks to seize "control" of assets previously held by the investor without providing adequate compensation. As recently as October 2, 2006, an ICSID tribunal determined in the case of ADC Affiliates Ltd and ADC & ADMC Management Ltd v. Hungary —concerning a project to construct a new terminal at Budapest Airport—that revenues to be derived from the operation of the terminal had been expropriated by the state. The investor had relied upon protections afforded by a BIT between Hungary and Cyprus and initiated a claim at ICSID in Washington, D.C.

As may be seen from the list of disputes referred to ICSID in the 1990's and the early years of this century, investor protection has traditionally been seen as a tool available to protect the interests of Western investors against expropriation without due compensation or unfair inequitable/discriminatory treatment by an emerging state. Because many of the world's natural resources are located in areas of heightened political risk, investor protection through BIT's is an area of increasing significance across resource rich states. More recently, the increase in value of natural resources including, in particular, oil and gas assets, and the political changes in South America have led affected investors to initiate claims (see a listing of pending cases on the ICSID Web site at http://worldbank. org/icsid/cases/ awards.html).

In many high-stakes investor-state arbitrations there is a significant political undercurrent, and ultimate settlements may be influenced not only by negotiations affecting individual investors, but by wider political lobbying. It should be noted that certain countries, particularly in Latin America, are enacting legislation intended to limit the availability of arbitration.

On the other hand, many investor state arbitration claims initiated in recent years have at their root political and economic difficulties that have befallen many Latin American countries. Argentina is a case in point. There, the economic collapse that resulted in a series of emergency measures has prompted more than 30 foreign investors to initiate BIT claims.

An illustration of how this area of international arbitration is developing can be seen in the extent to which the number of claims registered at ICSID has grown over the last 10 years. More than 300 claims have been registered with ICSID, of which approximately 100 remain pending, and new claims are being registered with increasing frequency. Investor-state claims also proceed under UNCITRAL, ICC, LCIA, the Stockholm Chamber, NAFTA, and the Energy Charter Treaty, each of which, unlike ICSID, does not disclose statistics of ongoing disputes.

Investors who have been able to commence investor-state claims have been fortunate in that they have been able to rely upon treaties that just happen to be applicable. Increasingly, as part of a prudent political risk management strategy sophisticated parties with the aid of experienced counsel are "structuring" their investments so as to ensure that they have a network of treaties available in the event that their rights are adversely affected during the life of the investment.

Conclusion
Countries across the developing/ capital importing world—by adoption of the New York Convention, the UNCITRAL Model Law, and their entry into BIT's or MIT's—have served to improve the investment climate and further boosted the flow of capital into their economies. International arbitration provides a key tool for resolving disputes and promoting business confidence in transnational commercial ventures. International arbitration is an important stimulus for global economic and social growth because it helps reduce commercial and political risk for investors. It is an effective and important tool, but one that needs be used with sophistication by investors and their counsel.