International Arbitration in Franchising and Distribution

International arbitration compares favorably with the alternative of granting a country's court system the power and authority to control dispute resolution. In international arbitration, the parties have more control than in alternative systems and are better able to enforce their awards.

In the drafting stage, the parties can agree on the place of arbitration, the language of the proceedings, the procedure to be followed, the depth, intensity and limits of discovery, the length of the arbitration (from beginning to end) and the applicable law. When a dispute arises, the tribunal decides what the parties have not already decided for themselves. The tribunal requests the parties to agree on the scope of the issues to be decided, in a document called the “Terms of Reference,” which is similar to a pretrial order, and the dispute resolution begins with the tribunal's involvement. At the end of the process, the parties have a new legal framework in the form of an arbitral award, the resolution that the parties could not negotiate for themselves.

When comparing alternative investments or transactions, foreign nationals and U.S. distributors should ask, “Can I trust the local legal system? Should I not shape and control the manner in which the dispute is resolved through arbitration?” Most will choose a clause selecting a recognized arbitration administrator to establish a qualified tribunal.

The parties select a neutral forum to avoid a “home court advantage.” The parties can agree on the language of the arbitration, typically English, even if the arbitration occurs in a non-English-speaking country. The arbitrators themselves need to certify that they are independent from the parties as no party-appointed advocates can masquerade as arbitrators in international arbitration. The entire process is intended to be as neutral as possible and expedited as compared to most court proceedings. Even complicated cases can be concluded within nine months from filing the request to the rendering of an award, with interim relief available and limited discovery.

Advantages of International Arbitration Awards

International arbitration awards are more readily enforceable around the world than a judgment by a court. The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) is part of the law in 134 signatory countries, including all industrialized countries such as Japan, the United Kingdom, France, the United States, Germany, Canada, China, the Russian Federation, Mexico, Brazil and Argentina. The New York Convention provides only limited grounds for challenge of an award, although some countries may impose their own restrictions on the enforceability of awards.

Unlike courts, which have their own established procedure regarding jurisdiction, competence, conduct of actions, proof of facts and manner of proceeding, the parties control the arbitration and have the freedom to limit or enhance discovery. Parties are able to maintain confidentiality and privacy in arbitration proceedings. The parties can adjust their disputes and deal with trade secrets outside the prying eyes of competitors. Although franchise disclosure laws may require disclosure of the initiation of proceedings and outcome, no one will be able to access the filings and confidential information within the arbitration.

The procedure of international arbitration promotes conservation of time and energy. The parties file comprehensive briefs, called “memorials,” which are accompanied by witness statements under oath and exhibits. Only limited discovery is generally permitted absent express authority in the arbitration clause. Minor document exchanges are permitted generally, but depositions are rare.

The memorials are exchanged in advance of the hearing and read by the tribunal, limiting the number of days of hearing. The hearings are expedited, with the witnesses invited to verify their previously submitted witness statement. After a quick introduction, either the tribunal or the opposing party asks questions and the witness completes the testimony in an hour or two. The newest procedure is panel examination (colloquially referred to as “hot-tubbing”), where opposing experts, for example, testify side by side regarding how their answers differ to the same question. Then the parties are invited to ask each of the experts questions. This procedure is less adversarial and more focused on obtaining all of the information necessary to reach the right result. Naturally, lawyer preparation and demeanor can be very different in this setting.

Practical Considerations

International arbitration can be expensive because of travel and the cost of quality arbitrators, but the expense is recoverable in the award if you prevail, and is more likely to be awarded by an arbitration tribunal than by a court. Internationally, the presumption is that counsel fees are awarded to the prevailing party. You may wish to substitute or augment your regular counsel with counsel experienced in international arbitration as the dynamics and procedures can be different. The very limited grounds for overturning an arbitration award means that you only have a single opportunity to make a first and lasting impression. On the other hand, you eliminate the risk of corruption and runaway jury outcomes by choosing one of the established arbitration organizations.

Talk with international arbitration counsel if you are drafting your clause so that you can intelligently select the procedural rules to apply. Expressly reserve the availability of provisional relief and interim measures being awarded by the tribunal but avoid narrowly prequalifying arbitrators in the clause. Decide on confidentiality in the proceedings and whether the award will be reasoned or just a summary decision.

A fair clause will help get the deal done and will protect all parties. The key is knowing what you are doing when you go international. 

Craig R. Tractenberg is the chair of the global franchise and distribution practice at Nixon Peabody. He is a former editor of the ABA Franchise Law Journal. Tractenberg can be reached by e-mail at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.

The growth of international franchising and distribution requires offers of user-friendly agreements. International dispute resolution clauses often require arbitration of these disputes before a recognized and supervised international arbitration provider. Experienced parties recognize the benefit of controlling time and costs when dealing with the complexity of cross-border transactions, and they rely on the predictability of international arbitration providers in resolving disputes.

Franchising and distribution can benefit from the lessons learned by sovereign governments that seek to increase foreign investment within their borders. If you want foreign investment, whether you are a government or a distributor of goods and services, you need to provide a fair forum for resolving disputes.

International Arbitration Helps International
Transactions

International arbitration compares favorably with the alternative of granting a country's court system the power and authority to control dispute resolution. In international arbitration, the parties have more control than in alternative systems and are better able to enforce their awards.

In the drafting stage, the parties can agree on the place of arbitration, the language of the proceedings, the procedure to be followed, the depth, intensity and limits of discovery, the length of the arbitration (from beginning to end) and the applicable law. When a dispute arises, the tribunal decides what the parties have not already decided for themselves. The tribunal requests the parties to agree on the scope of the issues to be decided, in a document called the “Terms of Reference,” which is similar to a pretrial order, and the dispute resolution begins with the tribunal's involvement. At the end of the process, the parties have a new legal framework in the form of an arbitral award, the resolution that the parties could not negotiate for themselves.

When comparing alternative investments or transactions, foreign nationals and U.S. distributors should ask, “Can I trust the local legal system? Should I not shape and control the manner in which the dispute is resolved through arbitration?” Most will choose a clause selecting a recognized arbitration administrator to establish a qualified tribunal.

The parties select a neutral forum to avoid a “home court advantage.” The parties can agree on the language of the arbitration, typically English, even if the arbitration occurs in a non-English-speaking country. The arbitrators themselves need to certify that they are independent from the parties as no party-appointed advocates can masquerade as arbitrators in international arbitration. The entire process is intended to be as neutral as possible and expedited as compared to most court proceedings. Even complicated cases can be concluded within nine months from filing the request to the rendering of an award, with interim relief available and limited discovery.

Advantages of International Arbitration Awards

International arbitration awards are more readily enforceable around the world than a judgment by a court. The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) is part of the law in 134 signatory countries, including all industrialized countries such as Japan, the United Kingdom, France, the United States, Germany, Canada, China, the Russian Federation, Mexico, Brazil and Argentina. The New York Convention provides only limited grounds for challenge of an award, although some countries may impose their own restrictions on the enforceability of awards.

Unlike courts, which have their own established procedure regarding jurisdiction, competence, conduct of actions, proof of facts and manner of proceeding, the parties control the arbitration and have the freedom to limit or enhance discovery. Parties are able to maintain confidentiality and privacy in arbitration proceedings. The parties can adjust their disputes and deal with trade secrets outside the prying eyes of competitors. Although franchise disclosure laws may require disclosure of the initiation of proceedings and outcome, no one will be able to access the filings and confidential information within the arbitration.

The procedure of international arbitration promotes conservation of time and energy. The parties file comprehensive briefs, called “memorials,” which are accompanied by witness statements under oath and exhibits. Only limited discovery is generally permitted absent express authority in the arbitration clause. Minor document exchanges are permitted generally, but depositions are rare.

The memorials are exchanged in advance of the hearing and read by the tribunal, limiting the number of days of hearing. The hearings are expedited, with the witnesses invited to verify their previously submitted witness statement. After a quick introduction, either the tribunal or the opposing party asks questions and the witness completes the testimony in an hour or two. The newest procedure is panel examination (colloquially referred to as “hot-tubbing”), where opposing experts, for example, testify side by side regarding how their answers differ to the same question. Then the parties are invited to ask each of the experts questions. This procedure is less adversarial and more focused on obtaining all of the information necessary to reach the right result. Naturally, lawyer preparation and demeanor can be very different in this setting.

Practical Considerations

International arbitration can be expensive because of travel and the cost of quality arbitrators, but the expense is recoverable in the award if you prevail, and is more likely to be awarded by an arbitration tribunal than by a court. Internationally, the presumption is that counsel fees are awarded to the prevailing party. You may wish to substitute or augment your regular counsel with counsel experienced in international arbitration as the dynamics and procedures can be different. The very limited grounds for overturning an arbitration award means that you only have a single opportunity to make a first and lasting impression. On the other hand, you eliminate the risk of corruption and runaway jury outcomes by choosing one of the established arbitration organizations.

Talk with international arbitration counsel if you are drafting your clause so that you can intelligently select the procedural rules to apply. Expressly reserve the availability of provisional relief and interim measures being awarded by the tribunal but avoid narrowly prequalifying arbitrators in the clause. Decide on confidentiality in the proceedings and whether the award will be reasoned or just a summary decision.

A fair clause will help get the deal done and will protect all parties. The key is knowing what you are doing when you go international. 

Craig R. Tractenberg is the chair of the global franchise and distribution practice at Nixon Peabody. He is a former editor of the ABA Franchise Law Journal. Tractenberg can be reached by e-mail at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.