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“Litigation strikes back” or “return of the litigation”, The Hague Convention on Choice of Court Agreements 2005 vs international commercial arbitration Eugene Duhovnikoff BA/LLB

The Hague Convention on Choice of Court Agreements was concluded in 2005 but as yet it has not entered into force. The convention has been signed but not ratified by the United States and the European Union.[1] It has been acceded to by Mexico and ratification by one more country will trigger its entry into force.

Below are some of the impacts which the Convention will have on existing mechanisms available for resolution of global trade and commerce disputes including some of the difficulties which are presented by existing commercial arbitration practices - practices which might be improved upon if it enters into force.

When it comes to resolving multi-jurisdictional commercial disputes there has been much debate about the lower cost and higher speed of international commercial arbitration as opposed to international commercial litigation. A common postulate states that the flexibility of the arbitration procedure and the finality of awards can lead to substantial savings of both time and money. Having said that this is not universally true nor universally accepted among the legal and other professions. The opposed position can be best summarized by Heydon J [2] in the following passage:

"The attractions of arbitration are said to lie in speed, cheapness, expertise and secrecy ... [I]t must be said that speed and cheapness are not manifest in the process to which the parties agreed. A commercial trial judge would have ensured more speed and less expense. On the construction point it is unlikely that the arbitrators had any greater relevant expertise than a commercial trial judge. Secrecy was lost once the reinsurers exercised their right to seek leave to appeal. The proceedings reveal no other point of superiority over conventional litigation. One point of inferiority they reveal is that there have been four tiers of adjudication, not three."

 

The Convention

Ideally, having The Hague Convention coming into force will provide the international trade community with an alternative international regime for the resolution of their disputes. In other words they will have a further option available to them. According to Art. 6 of Convention state parties to it have to recognize a "Choice of Court Agreement" between parties in civil and commercial matters. Therefore if a court is not chosen in the agreement it must put in place a stay of the proceedings. This exclusive choice of a contracting state's court means that provided the Convention enters into force there will be an international alternative to international arbitration.

 

Difficulties

Despite that there are some legal and non legal difficulties with the proposition that a Hague Convention regime will provide an effective regime.

 

Enforcement

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards already provides an effective cross-border enforcement mechanism. If it is amended to include awards made by the courts under Convention then, at least theoretically, there will be no additional vadd-ons' in terms of costs and delay between enforcing awards made under international commercial arbitration and the usual adversarial litigation.

 

Choice of Court Agreement vs Choice of the Judge

International commercial arbitration allows the parties to appoint a specific person or a number of persons to be the arbitrators of their disputes. Referring a dispute to an international arbitration centre like the Hong Kong International Arbitration Centre also provides the parties with a panel of experienced professionals. Under the Convention the parties choose the courts of a contracting State rather than a specific court. Putting aside inter­state jurisdictional problems [3] the parties would not be able to choose a specific judge to resolve their dispute. The legal systems of many countries are already overloaded. There can be no guarantee that a judge with a background in criminal law would not have to make a decision in a complex cross border commercial dispute.

 

Psychological differences and secrecy

Secrecy is a well known advantage of the arbitration route. While it can be argued that once a party has exercised a right to seek leave to appeal secrecy is lost it would not be lost outright. The opposite is almost always the case in a situation involving litigation. For example the balance of trade in recent decades has shifted in favor of East Asian, South East Asian and the former USSR economies all of which are becoming the biggest importers and exporters of both raw and of ready-made products. The legal, political and business landscape of those countries differs markedly from countries which have English common law as their original legal system.

While in theory the parties are often free to choose whether to proceed by way of arbitration or litigation in practice there are very important psychological reasons for the business people involved not to step out of the shadows. There are two distinct risks associated with choosing litigation. The first one is that even if the litigation occurs in the courts of another country there is a risk that the domestic officials will find out about the litigation and the sums involved into it. Modern means of communication make it quite easy. When some countries' political systems are built on corruption and lobbying for family interests there can be a constant commercial war between three powers: the officials, the business communities and the state enforcers (secret services, police, customs and other state organs whose main task is to protect the state or their own interests). All of these groups are involved in business and all of them constantly endeavor to enlarge their sphere of influence over available international trade and investment channels.

There can also be a power struggle between various families or 'clans' where a family or an organization has its members within all three of the above-mentioned power houses and fights another 'clan' or a family for control over international trade channels. These 'clans' should not be confused with organized crime; they tend to take over the legitimate trade channels through non-violent means. This situation is true for East Asia, India, Russia, South East Asia and a number of other regions.

What is clear is that all of these groups spend a lot of their resources to maintaining secrecy of their operations and would even prefer not to have a dispute resolved at all rather than have it go to a court hearing particularly where there are various offshore business entities being bought, the internal intelligence departments are being maintained and secret means of communication are being used all for one purpose: to keep the owners' identity and business structure confidential. The specific circumstances of East Asia and South East Asia do not particularly entail any tax avoidance. Instead it is considered that entrepreneurs from these countries pay their taxes regularly. Their main concern is not having a mayor or a governor finding out who their buyer or supplier truly is so that a competing company cannot be incorporated by a mayor or a governor for a daughter/brother/sister/nephew within a week so as to 'take out' a particular entrepreneur from the type of business involved.

 

Further psychological differences

There is a trend of legal thought in the Commonwealth which can be summarized by quoting Mocatta J[4]: "It is well known that English law is nearly unique in the degree of interference it permits the courts in the conduct of arbitrations and the settlement of disputes thereby." That is just a matter of perception. Entrepreneurs from East Asia, South East Asia and the former USSR would argue that English law is much more liberal rather than their domestic legal systems which did not allow any private trade whatsoever some twenty or thirty years ago.

Provided that the Convention will come into force those people in business would still prefer the common law of the English courts or the courts of another Commonwealth country as a forum for resolution of their disputes to their own domestic Courts. In this regard the Hague Convention would bring little change to international trade practices whether it comes into force or not.

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[1] Except for Denmark all of the EU members approved the signing of this convention.

[2] Westport Insurance Corp v Gordian Runoff Limited (2011) 244 CLR 239.

[3] For example Australia or Russia and many other countries are Federations with the number of states within one country. Choosing the right court will be difficult in some situations.

[4] Prodexport State Co for Foreign Trade v ED & F Man Ltd [1973] QB 389 at 395.

 

No advice

This article contains general information about legal matters. The information is not advice, and should not be treated as such.

 

Limitation of warranties

The legal information on this website is provided "as is" without any representations or warranties, express or implied. Reeves Duhovnikoff & Associates Limited makes no representations or warranties in relation to the legal information on this website. Without prejudice to the generality of the foregoing paragraph, Reeves Duhovnikoff & Associates Limited does not warrant that: the legal information on this website will be constantly available, or available at all; or the legal information on this website is complete, true, accurate, up-to-date, or non-misleading.

 

Professional assistance

You must not rely on the information on this website as an alternative to legal advice from your attorney or other professional legal services provider. If you have any specific questions about any legal matter you should consult your attorney or other professional legal services provider.

 

Reeves/Duhovnikoff & Associates Ltd. 2017

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