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JOSEPH T. McLAUGHLIN*

Arbitration and Developing

Countries
I. Introduction
As a practical matter, the prudent investor seeks investments which will
yield a fair return at a minimum risk. The other party in the commercial
equation, the entrepreneur in the market for capital, attempts to encourage
the investor by assuring him that the risks inherent in a particular business
transaction will be acceptable. Because of the possibility of conflict between
them, both the investor and the entrepreneur want specific assurances that
potential disputes will be resolved promptly, efficiently, and inexpensively.
Arbitration is the preferred dispute resolution mechanism for many such
investors and entrepreneurs.

II. The Growth in International Arbitration

The rapid expansion of commercial relations between the industrialized
nations of Western Europe and the United States, on the one hand, and the
developing countries, particularly the petroleum exporting countries, on the
other, coupled with the growing role of state enterprises in commercial
transactions, has underlined the necessity for the efficient resolution of
disputes between parties contracting on an international basis. Recent evi-
dence indicates that arbitration is becoming the preferred method of resolv-
ing the conflicts which often arise between these parties.'

*Mr. McLaughlin practices law in New York City.

The author gratefully acknowledges the assistance of Ms. Enola G. Aird, Yale Law School,
Class of 1979.
'Arbitration is administered by agencies in almost every trading center of the world and has
received widespread endorsement from scholars and commentators. For example, an average
of almost two hundred new disputes are submitted to the International Chamber of Commerce
each year. See ICC Arbitration: The International Solution to International Business Disputes,
ICC PUBLICATION 301 (Oct. 1977), p. 34. See also B. Cremades, Arbitration and Business
(March, 1978) (Provisional Report presented at the Sixth International Arbitration Congress,
Mexico City); Ehrenhaft, Effective International Commercial Arbitration, 9 LAW & POL'Y
212 INTERNA TIONAL LA WYER

Ideally, international disputes should be resolved promptly so that the

flow of trade is not unduly disrupted. However, it has been suggested that
the resolution of these disputes in national courts can substantially increase
the risk, and therefore the price, of an international contract entered into on
a fixed-price basis.' The increase in price has been estimated to be as high as
50 per cent.' This risk factor represents the contingent liability as perceived
by one of the parties when any dispute must be resolved by a foreign court
rather than by an arbitral tribunal in some internationally recognized
forum.
Traditional litigation in a national court can be a costly, time-consuming,
cumbersome and inefficient process, which obstructs, rather than facili-
tates, the resolution of business disputes. The formal adversarial structure
and the possibility of national bias can destroy the business relationships
which are conducive to the smooth flow of international trade. Access to
the national courts may be restricted because of the overcrowded court
dockets in many countries. The intricacies of the national procedures may
be unknown to one or more of the parties. Moreover, foreign judgments
may be difficult to enforce. For these reasons and others, businessmen seek
alternatives to traditional litigation." Arbitration is a potentially more effi-
cient and attractive mechanism.
In the context of international trade, the discordant parties will be from
different parts of the world, with correspondingly different world views,
cultures and legal systems. Ideally, arbitration provides a flexible, mutually
acceptable means of conflict resolution because the process is consensual:
one party is not dragged unwillingly into court by another. The procedure is
also understandable, flexible and informal, not overly burdened with the
complex of legal rules and binding precedents. The arbitrators are often
chosen by the parties and usually possess substantial commercial knowl-
edge. Other positive features of arbitration include jurisdictional neutrality,
confidentiality, reduced costs, and the possibility that the parties may strike
a compromise which might not be available in a court of law. In general, the
process is concerned with simple justice rather than the niceties of legal
form and procedure.'

INT'L Bus. 1191 (1977); HANDBOOK OF INSTITUTIONAL ARBITRATION IN INTERNATIONAL TRADE

(E. Cohn, M. Domke, & F. Eisemann eds. 1977); Note, The Growing Consensus on Interna-
tional Commercial Arbitration, 68 AM. J. INT'L L. 709 (1974).
1K. Bocksteigel, Arbitration and Courts - Recent Developments (March 1978) (Paper
Presented at the Sixth International Arbitration Congress, Mexico City).
'4REPORT FROM EUROPE, No.2, at 2, (Chemical Bank, Feb.1977).
'For a discussion of the disadvantages of litigation in international business disputes, see
Ehrenhaft, Effective International Commercial Arbitration, 9 LAW & POL'Y INT'L Bus. 1191
(1977). Cf. Holtzmann, Arbitration and the Courts (March, 1978) (Sixth International Arbi-
tration Congress, Mexico City).
'See B. Cremades. What is Arbitration? What Are Its Results, THE TECHNIQUES OF INTERNA-
TIONAL ARBITRATION, ICC Seminar (April 1977), at 2-10; Sanders, International Commercial
Arbitration, 20 NETH. INT'L L. REV. 37 (1973).
 Arbitration and Developing Countries

III. Views of Developing Countries

One of the most significant economic factors of the last two decades has
been the change in the character of foreign investment in developing coun-
tries. 6 These countries have truly begun to assume an increasingly important
role in the world economic and political order. Many of these countries
were, at one time or another, colonized by some industrialized nation. Since
gaining their independence, they have begun to assume an active role in the
exploitation, development and marketing of their own natural resources.
Since they often lack the technical expertise and the capital to undertake
such development alone, they are necessarily dependent upon external
sources of investment in order to increase their share of world trade.' Al-
though private investors have been primarily attracted to commercially so-
phisticated industrialized nations, they have shown increasing interest in
developing countries. The shifting balance of economic power has made the
developing countries highly desirable markets. They are leading contenders
for investment capital. However, the perception by Western investors that
these countries are economically naive or that they are risky markets has
often inhibited investment. The developing countries themselves have their
own predispositions against foreign investment. A long history of coloniza-
tion, coupled with a heightened nationalism, has frequently made them
unreceptive to any foreign presence. Both parties have approached each
other with trepidation. Nevertheless, they have approached one another
since the economic incentives are overwhelming.'
Developing countries and investors from the industrialized nations9 have
negotiated special types of agreements which take into account the changing
nature of the world economic order. These are not necessarily short-term

'The term "developing countries" is often used to describe countries in which the per capita
real income is low in relation to the per capita real income of the United States, Canada, or
Western Europe. See E. 1. NWOGUGU, THE LEGAL PROBLEMS OF FOREIGN INVESTMENT IN DE-
VELOPING COUNTRIES 1 (1965). However, the collective term "developing countries" does not
adequately reflect the fact that each of these countries is at a different stage in its political,
economic and legal development. See W. FRIEDMAN & J. BEGUIN, JOINT INTERNATIONAL Busi-
NESS VENTURES IN DEVELOPING COUNTRIES (1971):
Within the general framework [developing countries] there are enormous differences be-
tween countries such as India or Brazil, which have a considerable background of manage-
rial, scientific, and technological training, as well as considerable commercial experience and
sophisticated indigenous enterprises, and some of the small, new independent states of
Africa or the West Indies, which have made a sudden transition from tribal and static
communities to the aspirations of modern states.
Id. at 5.
'Id.
Vid.
'These private investors are generally multinational corporations. See generally Ryans &
Baker, ICSID as a Little-known Solution to Investments in High Risk Countries, 1975 AKRON
Bus. & ECON. REV. 8; Domke, Arbitration, NATIONALISM AND THE MULTINATIONAL
ENTERPRISE: LEGAL, ECONOMIC AND MANAGERIAL ASPECTS 233-243 (1973).
214 INTERNATIONAL LAWYER

contracts; they tend to be developmental agreements'" by which a foreign

investor agrees to provide the mechanisms for a long-term project. Such
agreements are often executed between a foreign investor and the sovereign
itself and have replaced the concession agreements of the seventeenth, eigh-
teenth and nineteenth centuries. They may be an intrinsic part of a nation's
economic development program and are often collaborative efforts in
which the government offers the investor a fair return on its investment in
return for a positive contribution to the national economic development
plan.
A developing country's goals and its perceptions of how these goals can
best be achieved may differ from those of the investor. Thus, after an
agreement is reached, differences may erupt while work on a project is in
progress or after the project has been completed. Accordingly, an essential
element of any economic development agreement, from the standpoint of
both parties, is some assurance that the project, be it long-term or short-
term, will come to fruition, that it will be managed efficiently, that the
profits and the risks will be allocated fairly, and that, if disputes arise, some
mechanism will exist for their resolution.
In negotiating an economic development agreement with a foreign inves-
tor, the government of a developing country will often prefer to submit
disputes to the developing country's courts. The outcome of this stage of
the negotiations will probably be determined, in large part, by the relative
bargaining power of the government and the foreign investor. The foreign
investor may normally be expected to resist such an arrangement. The
investor may fear, with or without a basis in fact, that the national judiciary
will be unable to effect an impartial resolution of the dispute, or he may be
reluctant to submit a dispute to what he considers to be an unsophisticated
judicial system. Assuming that recourse to national courts is unacceptable
to the foreign investor and that the foreign government is convinced, either

"The agreements are typically of three varieties: (1) purchase/sale of goods; (2) investment
and (3) transfer of technology. Purchases and sales include real estate, securities, services, and
are characterized by the actual transmission of economic goods; investments may be effected
by participation, collaborative efforts or by the delivery of material goods; transfers include
designs, specifications, procedures, patents, trademarks, engineering and technical assistance
and the continuous activity implied in the license or authorization from one party to the other
with respect to specialized knowledge. See Statement of H. Sierra, Sixth International Arbitra-
tion Congress, Mexico City (March 1978). See also Farer, Economic Development
Agreements: A Functional Analysis, 10 COLUM. J. TRANSNAT'L LAW 200 (1971). Professor
Farer has observed that "[these] agreements. . . embody the terms under which private capital
is invited into a developing country for a long term investment. Unlike some cosmetic adjust-
ments, the change in name reflects important substantive changes. The changed power rela-
tionship between capital-exporting and importing states; the changed values among governing
elites in the latter group of states; changed investor expectations, and to some degree, changed
functions for these agreements. . . . Today [these agreements] are recognized as important
channels for the transfer of technology, as stimulating agents for domestic entrepreneurship,
and most comprehensively, as inputs for a consciously directed program of economic growth."
Id. at 200.
 Arbitration and Developing Countries 215

by the investor's reasoning or economic power, of the relative benefits of

arbitration and agrees to it, many problems remain to be resolved.
Despite the many positive attributes of arbitration and its widespread use
throughout the world, arbitration does not provide the definitive answer to
all international disputes. Many countries are reluctant to resort to interna-
tional arbitration. Even if the parties resort to arbitration, Professor
Sanders has pointed out a problem they might encounter:
The different concepts of arbitration, looking at arbitration on a world-wide
basis, is another problem of international commercial arbitration. The concept of
arbitration is not the same everywhere in the world. The Anglo-Saxon concept of
arbitration differs from that of the civil law countries and those two concepts
both differ from the arbitration concept in the socialist countries. For the unifica-
tion of arbitration these different concepts constitute a great draw-back.'"
Often the very benefits which arbitration should ideally provide may be lost
in an international arbitration, unless the arbitration procedure is carefully
chosen and tailored by the draftsmen. They must (1) anticipate the practical
and legal consequences of the inclusion of an arbitration clause by taking
into account the views of the developing country; (2) select, where appropri-
ate, the recognized arbitration rules most suited to the agreement, and (3)
draft specific language governing arbitration under the agreement.
Arbitration's effectiveness will always depend upon how well it satisfies
the needs of the parties. A draftsman contemplating the insertion of an
arbitration clause in an agreement between a developing country and a
foreign investor should first acquire a basic understanding of the attitudes
of the developing country toward arbitration. He should know, for exam-
ple, that almost all countries in sub-Saharan Africa have adopted niodern
arbitration statutes'" and are parties to the Treaties of Friendship, Com-
merce and Navigation.' 3 If he is dealing with one of the countries of the
Middle East, he ought to know that they have long recognized arbitration as
a form of dispute settlement. However, despite this recognition, many of
these same countries hesitate to enforce awards of foreign arbitral tribunals
or to accept the application of foreign law to the resolution of conflicts
involving a state entity. Under such circumstances, such countries prefer to
resort to their national courts.
Latin American countries have long viewed arbitration with misgivings.
Their antipathy to international arbitration poses a continuing problem for
businessmen. Many of these countries continue to adhere to the Calvo
doctrine which severely restrains the creation of third-party adjudicative
devices for resolving disputes. Originally formulated as a defense against

"Sanders, supra note 5, at 44.

"Tiewul & Tsegah, Arbitration and the Settlement of Commercial Disputes: A Selective
Survey of African Practice, 24 INT'L & COMP. L.Q. 393, 398 (1975).
13/d.
216 INTERNA TIONAL LA WYER

European intervention, the doctrine has long been regarded as a major

hindrance to the flow of trade in Latin America."
Only four countries in Latin America (Chile, Cuba, Ecuador and Mexico)
have ratified the United Nations Convention on the Recognition and En-
forcement of Foreign Arbitral Awards. Although in 1975 the Inter-
American Convention On International Commercial Arbitration of the
OAS was signed by twelve Latin American countries'" and was heralded as
an event of "tremendous and vital significance," 6 only six countries Chile,
7
Panama, Costa Rica, Mexico, Uruguay and Paraguay have ratified it.'
Some Latin American countries remain suspicious of the arbitration pro-
8
cess. They fear that arbitration is designed to evade the local laws' and they
are concerned that the arbitration process may be used solely for the
investor's benefit. This suspicion of arbitration results in certain govern-
mental policies against any third-party dispute resolution whatsoever. Thus,
foreign investors in many Latin American countries have generally been
required to agree to resort to national courts in the event of any dispute.
It is also argued that present arbitration systems are alien to Latin Ameri-
can countries:
When an arbitration is suggested its principal office is more than likely located in
a foreign country and the individuals who staff the institution are both foreign
and unknown to one or both parties. This is often the case for the Latin American
businessman and lawyers. Or if the suggestion is made for ad hoc arbitration,
additional uncertainties present themselves. There are no familiar rules or proce-

"The Calvo doctrine manifests itself in clauses in concession agreements which prohibit
diplomatic intervention by the concessionaire's native country in the event of some commercial
dispute. The clause generally requires that the parties submit to local jurisdiction, and submit
to the application of local law. See generally, Wesley, The Procedural Malaise of Foreign
Investment Disputes in Latin America: From Local Tribunals to Fact Finding, 7 LAW & PoL'Y
INT'L Bus. 813 (1975); Abbott, Latin A merica and InternationalArbitration Conventions: The
Quandary of Non-Ratification, 17 HARV. INT'L L.J. 131 (1976).
Recent developments indicate that the Latin American countries may be more inclined to
engage in international arbitration. The Inter-American Convention on International Com-
mercial Arbitration, O.A.S.T.S. A/20 (SEPF), 14 INT'L LEGAL MATS. 336 was signed by
several countries in Latin America. The Convention acknowledged the utility and validity of
agreements to submit disputes between parties to international contracts to arbitration.
"Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nica-
ragua, Panama, Uruguay and Venezuela. See Report on the Inter-American Convention On
International Commercial Arbitration, 14 INT'L LEGAL MATS. 336 (1975).
6C. Norberg, [1978] 3 Y.B. CoM. ARB 13 (International Council for Commercial Arbitra-
tion).
"Updates Abbott, supra note 14, at 131.
"See, e.g., Wesley, supra note 14, examining Mexico and Venezuela's policies particularly.
This Latin American suspicion is not necessarily unreasonable. Indeed, Professor Tiewul has
said that "Arbitration is not always the objective exercise it appears to be .... Its usage is
often tainted by some of the defects and problems which make people flee from the courtroom
unto its umbrella. And it is often the seat of palpable injustice." He adds, however, ". . . these
are defects which are collateral to its misuse and whose eradication is to be striven for in the
process of developing the institution with a keener taste than ever." Tiewul & Tsegah, supra
note 12 at 398.
 Arbitration and Developing Countries

dures, there is no effective way to resolve procedural disputes, to determine where

the arbitration hearings should be held or to appoint the arbitrators if the parties
cannot choose them by agreement. In addition, at least two of the arbitrators will
probably be total strangers to one or both parties. In Europe, North America,
and a few other parts of the world where arbitration is more common, there is
familiarity with and confidence in the institutions and the arbitrators. But, in
Latin America these uncertainties can and often do lead to suspicion and rejection
of the procedure. Under these suspicions and resulting prejudice (sometimes
enacted into law), the growth of arbitration is severely impeded. '9
Many Latin American countries simply do not believe that their interests
will be safeguarded by the internationally recognized institutional arbitra-
tion centers. These centers are at least perceived by some as favoring the
Western industrialized nations.
Accordingly, commentators" have urged that arbitration structures be
refashioned to take into account the interests of the Spanish-speaking coun-
tries and to increase their participation and activism in these arbitral institu-
tions. Until progress in this regard is made, the potential for more complete
use of arbitration in Latin America will probably remain unrealized.

IV. Special Problems in Negotiating Arbitration

Clauses with Parties in Developing Countries
An investor contemplating arbitration as a dispute resolution mechanism
in a contract governing an international transaction with a party located in a
developing country (even one receptive to arbitration) must recognize that
there may be impediments to its use.

1. Choice of Forum
The choice of an arbitral forum raises highly significant issues. As Pro-
fessor Domke has noted, "[dieveloping countries no longer wish to see their
disputed commercial relations determined by Western-oriented arbitral
bodies outside their countries."" At the same time, the investor will proba-
bly want to avoid resolution of any dispute in the courts of a developing
country where nationalistic sentiments may be perceived as militating
against a just and impartial decision. The classic solution would be to agree
to arbitration in a third country under internationally recognized rules.
However, when the contracting party in the developing country is the gov-

"D. Straus, So Perfect in Theory-So Neglected in Practice, (March 1978) (Paper presented
at Sixth International Arbitration Congress, Mexico City). Professor Cremades has frankly
stated that "They (the institutional centres) are held to administer arbitration with a mentality
which to a certain degree and sometimes unconsciously tends to favor firms exporting capital
or importing raw materials." B. Cremades, Arbitration and Business 35, (March 1978) (Provi-
sional Report presented at the Sixth International Arbitration Congress, Mexico City).
"*Straus & Cremades, supra note 19.
"M. Domke & 0. Glossner, The Present State of the Law Regarding InternationalCommer-
cial Arbitration, in THE PRESENT STATE OF INTERNATIONAL LAW 3-15, 307-330 (M. Bos ed.
1973).
218 INTERNA TIONAL LA WYER

ernment itself or one of its agencies, as is common, it may be adverse to

such an arbitration on the grounds that submission to arbitration in a third
country would constitute an affront to its dignity as a sovereign. Accord-
ingly, the government may insist on some dispute resolution procedure
within its own borders. For example, in its agreement with the Pan Am
International Company, Argentina insisted upon, and ultimately obtained,
a clause providing for arbitration within its own borders. 22 Even where a
government agrees to arbitration in a third country, it may later accuse the
arbitral tribunal of bias and refuse to submit future disputes to arbitration
if the award is adverse to its position.23
A survey24 of arbitration procedures in the countries of the Middle East
reveals a preference for internal arbitration systems."5 Saudi Arabia and
Iran forbid arbitration in foreign countries under most circumstances and
require that the resolution of disputes be referred to their national tribunals.
Saudi Arabian Decree No. 58 of 1963 specifically limited the authority of
governmental organizations to subject themselves to foreign arbitration.
Companies entering into contracts with governmental entities in Saudi Ara-
bia cannot avail themselves of the facilities of international arbitration in
the event of a dispute. The investor's alternative in Saudi Arabia is the
Board of Settlement of Commercial Disputes (limited to disputes arising
from private contracts) or the Grievance Board which has jurisdiction over
government contracts. The Saudi Arabian Permanent Board of Concession
Appeals is also an available forum under certain circumstances.
Iran forbids arbitration outside its borders in the case of disputes involv-
ing governmental contracts. It has an internal arbitration tribunal for the
settlement of disputes involving a governmental body or agency. Here,
again, foreign investors must submit to the tribunal of the host country in
the event of a dispute arising out of a governmental contract, except under
unusual circumstances.
Disputes between the government of Oman and foreign firms are typi-
cally resolved through conciliation within Oman by the Committee for the
Settlement of Commercial Disputes. Its decisions are binding and nonap-
pealable. Egypt, on the other hand, appears to accept international arbitra-
tion without provisos and is a signatory to both the 1972 Convention of the
International Center for Settlement of Investment Disputes and the 1958
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards ("New York Convention").
In Israel, government agencies will not, as a rule, submit to international
arbitration. Accordingly, foreign contractors must agree to submit disputes

"6 Int. Legal Mats. 696, 722 (1967).

2 Int. Legal Mats. 45 (1963).
1'3
"See Setrakian, Arbitration under the Legal Systems of the Middle Eastern Countries,
ALI-ABA COURSE OF STUDY: CONSTRUCTION CONTRACTING IN THE MIDDLE EAST (1978);
Planagan, Albert, American Arbitration Association Library document (1977).
"Reference to the arbitration procedures of the various Middle Eastern countries are based
on the Setrakian paper, supra note 24.
 Arbitration and Developing Countries

to local arbitration tribunals. Israel does enforce foreign arbitral awards, if

not contrary to public policy, and is a signatory to the New York Conven-
tion.
Although some foreign parties contracting in Morocco have been able to
negotiate agreements providing for arbitration under the auspices of the
International Chamber of Commerce, resort to international arbitration is
avoided as much as possible. Most contract disputes are submitted to the
national courts or to Moroccan government organizations.
For several years, the government of Abu Dhabi provided in its contracts
for arbitration under the auspices of the International Chamber of Com-
merce with the law of the United Kingdom as the substantive law governing
the contract. However, recently it has begun to insist upon arbitration in
Abu Dhabi under Abu Dhabi law.

2. Choice of Law
The choice of the governing substantive law in international agreements
with arbitration clauses may also present some difficulty. Although coun-
tries such as Egypt and Algeria recognize the validity of agreements provid-
ing for arbitration under the procedural rules of, say, the International
Chamber of Commerce, these countries and others often insist upon the
application of their own substantive law.
Such an approach to the question of the governing substantive law of the
contract arises, in part, from the view expressed in many countries located
in Africa and Asia, that traditional principles of private international law
are somewhat biased in favor of Western industrialized interests. These
traditional principles are perceived to have been established at a time when
the needs and concerns of developing countries were not fully considered
and when an attitude of Western chauvinism characterized most dealings
with developing countries. 6
With respect to contracts for the transfer of technology, for example, Dr.
Humberto Briseno Sierra has recently observed:
There is an opposing trend from developing countries which emerges as the
project for the Code of Conduct prepared by the UNCTAD by the group
called of the 77. [sic) One ruling establishes that contracts on technology
transfer must be governed by the receiving country's law. This implies distrust
of arbitration and, mainly, of the foreign arbitration courts. 27

2
For example, in the arbitration between Petroleum Development (Trucial Coast) Ltd. and
the Sheik of Abu Dhabi, Lord Asquith of Bishopstone found that the law of Abu Dhabi was
nonexistent and unsuited for modern commercial transactions. He then chose to apply what he
called "principles rooted in good sense and common practice of the generality of civilized
nations." 18 I.L.R. 144, 149 (1951). See generally B. Cremades, Arbitration and Business, 35
(March 1978) (Paper Presented at the Sixth International Arbitration Congress, Mexico City);
See also Ramazani, Choice of Law Problems and International Oil Contracts: A Case Study,
II INT'L & COMP. L.Q. 503 (1962).
27
H. B. Sierra, General Statement Presented at the Sixth International Arbitration Congress,
Mexico City (March 1978) at I.
220 INTERNA TIONAL LA WYER

3. Arbitrable Issues
In some instances, countries have repudiated their arbitration commit-
ments and insisted upon national procedures for the resolution of disputes
between contracting parties.2" The Organization of Petroleum Exporting
Countries (OPEC), for example, adopted a Resolution in 1967, providing
inter alia, that:
Except as otherwise provided for in the legal system of a Member country,
disputes arising between the Government and operators (i.e., the oil compa-
nies) shall fall exclusively within the jurisdiction of the competent national
courts as and when established.
This resolution formed a basis for the contention that, in cases of expro-
priation, a country should have the right to rescind arbitration agreements
and substitute its own national tribunals as the method for redressing the
claims of the concessionaire.
Libya's actions, following the issuance of its Decree of September 1,
1973, provide a graphic example of this attitude. The Libyan government
decreed that fifty-one percent of the interests of the foreign oil companies
operating in that country under concession agreements would be national-
ized. In the concession contracts, Libya had agreed to resolve any disputes
with the oil companies through arbitration. Thus, after the expropriation
Decree, the oil companies requested arbitration and the appointment of an
arbitrator. Libya, however, refused to abide by the terms of the agreement
and did not appoint an arbitrator. The companies requested that the Presi-
dent of the International Court of Justice appoint an arbitrator to hear and
resolve the dispute. The Libyan government, opposing the request, argued
that the nationalization decree was an act of sovereignty and, therefore, not
subject to arbitration.
Subsequent events, however, demonstrated that this argument will not be
readily accepted in an international forum. In the ensuing Texaco-Libya
arbitration,29 the arbitral tribunal forcefully rejected Libya's position in this
regard. The government's agreement to submit to arbitration was held to be
binding despite the nature of this dispute. Notwithstanding Libya's refusal
to submit to arbitration, Ren6-Jean Dupruy, the sole arbitrator in the pro-
ceeding, went forward with the arbitration. He concluded that neither the
OPEC Resolution of 1967 nor the United Nations General Assembly resolu-

"See also the Anglo-Iranian Oil Case, I.C.J. Pleadings 11, 40, 258, 267-68 (1952); Sapphire
International Petroleums Ltd. v. Nat'l Iranian Oil Co. Private Arbitration Award (1963 Rep.
35 I.L.R. 136 (1967). This position has caused foreign investors to question the binding
character of arbitration clauses in certain circumstances. In a survey of attitudes of business-
men toward arbitration in general and the International Convention for the Settlement of
Investment Disputes (ICSID) in particular, one respondent stated, in a somewhat exaggerated
fashion, that "recent actions in South America and the Middle East show that they pay no
attention to arbitration or contracts." Ryans & Baker, The International Centre for Settlement
of Investment Disputes, (ICSID), 10 J. WORLD TRADE L. 65, 78 (1976).
"See discussion and text of the Texaco-Libya Award in 104 JOURNAL Du DROIT INTERNA-
TIONAL 350 (1977).
 Arbitrationand Developing Countries 221

tions regarding sovereignty over natural resources could be used by Libya to

evade its contractual obligations.
The significance of this Award should not be overlooked. There is now
well-reasoned support for the proposition that contractual commitments
between a sovereign state and a foreign investor will be enforced against the
state by an international arbitral tribunal. The announcement of the Award
in this instance resulted in Libya's settling the dispute on terms favorable to
the claimant. The explicit message of the Texaco-Libya Award is that when
a sovereign is a party to an international commercial agreement with a
comprehensive arbitration clause, it may not assert sovereign immunity in
order to avoid its contractual agreement to arbitrate. It would appear, then,
that if a state wishes to exclude expropriation disputes from the arbitrable
issues under an agreement, it should do so explicitly.

V. Major Systems of Arbitration

If a party in a developing country does not insist (or have the bargaining
power to insist) on arbitration or traditional litigation within its borders, it
can choose from a variety of recognized international arbitration systems.3"
These systems differ in many respects, including the amount of administra-
tive costs and arbitrators' fees, the method of selecting arbitrators, the
procedural and evidentiary rules, and the form and content of the arbitral
award. Recognizing the multiplicity of available arbitration systems
throughout the world, it is still possible to identify some of the more promi-
nent systems of international arbitration as follows:

"These institutional centers are an outgrowth of the activity of the 19th century trade
associations. The specialized trade associations were the self-governing associations of various
industries and trades which developed rules applicable to their respective activities. A concomi-
tant of the growth of the trade associations was the development of mechanisms for dispute
resolution and the settlement by adjudicators skilled in the trade. There was a gradual recogni-
tion of the utility of this type of organization. Sometime prior to World War I, Chambers of
Commerce in countries active in international trade attempted to create similar mechanisms for
providing such dispute settlement services on a large scale and on a non-specialized basis. The
trend began in Paris in 1923 with the creation of the International Chamber of Commerce. It
was followed in the 1930s by the American Arbitration Association in the United States and, in
the Soviet Union, by the All-Union Chamber of Commerce in Moscow. Since then, fueled by
numerous international and multilateral conventions, centers have sprung up throughout the
world. Their major advantage is that they have a highly developed set of rules which permit
them to guarantee the validity of arbitral agreements and to insure their enforcement. See
supra note 1, HANDBOOK OF INSTITUTIONAL ARBITRATION IN INTERNATIONAL TRADE (1977). An
alternative to the institutional centers is ad hoc arbitration. This choice often has many
advantages. The parties may structure the form to suit their needs and they pay no administra-
tive charges. But precautions must still be taken to insure that the death or unavailability of an
appointed arbitrator or the refusal of one party to comply with the agreement does not render
the arbitration clause meaningless. One method of dealing with this is to provide for some
recognized national legislative code of arbitration to prevail, subject to contrary provisions of
the contract. See A. Martin, "Points to Note in Drafting Arbitration Clauses and Choosing
Arbitrators," London, England (November 1976).
222 INTERNA TIONAL LA WYER

1. The Rules of the International Centre for the Settlement of Investment

Disputes ("ICSID" or "Centre");
2. The Rules of Conciliation and Arbitration of the International Cham-
ber of Commerce ("ICC") (1975);
3. Commercial Arbitration Rules of the American Arbitration Associa-
tion ("AAA") (1977);
4. United Nations Commission on International Trade Law Arbitration
Rules ("UNCITRAL") (1976) and
5. Rules of the Arbitration Institute of the Stockholm Chamber of Com-
merce ("SCC") (1976).
(The London Court of Arbitration Rules have been recently revised and are
not discussed in this article.)
These five systems vary significantly with respect to numerous issues and,
before selecting a particular system, they should be compared in detail.
Even after the selection of an institutional system is made, however, the
draftsman should be aware that the arbitration rules selected will not an-
swer every question which may arise. Thus, careful thought should be given
to restructuring or adding rules, where appropriate, to conform to the needs
of the parties. Of course, each system has positive and negative aspects
which must be weighed in order to determine what is best suited to the needs
of particular parties. What follows is a brief outline and comparison of the
five systems listed above.

1. ICSID Arbitration
The ICSID 3 ' is an intergovernmental agency created in 1966 by the Con-
vention on the Settlement of Investment Disputes between States and Na-
tionals of Other States. The Centre's authority is limited to investment
disputes in which one of the parties is a state ("host state"). As of March
1978 there were 76 signatories to the Convention. These included the indus-
trialized Western nations and many of the developing countries of Africa,
Asia, the Middle East and the Caribbean. The ICSID was designed to
facilitate investments in developing countries by providing a specialized
mechanism for investment dispute settlement. It offers facilities for arbitra-
tion and/or conciliation of disputes. The Centre's decisions are not subject
to review by the courts of the contracting state. The signatory states desig-
nate experts in the areas of arbitration and conciliation. These names are
maintained by the Centre. When a dispute arises, the Centre designates an
Arbitration or Conciliation Panel to settle it. The arbitration or conciliation
may take place at any location designated by the parties. The decision of the

"See Amerasinghe, How to Use the International Centre for Settlement of Investment
Disputes by Reference to its Model Clauses, 13 INDIAN J. INT'L L. 530 (1973); Farer, Economic
Development Agreements: A Functional Analysis, 10 COLUM. J. TRANSNAT'L L. 200, 234
(1971).
 Arbitration and Developing Countries

panel is binding on the parties and is enforceable under the rules of interna-
tional law. The Centre acts as supervisor of the proceedings and provides
certain procedural rules.
The ICSID is particularly appealing to developing countries. A state is
not obliged to use its facilities even after it has signed the Convention. The
state consents to the Centre's jurisdiction when the dispute arises. Once
consent is given, it may not be withdrawn. The state is assured that the
investor's national state will not intervene to protect the investor or assert
an international claim on his behalf. The state may also require that the
investor resort to its local courts as a prerequisite to invoking the jurisdic-
tion of the ICSID. Moreover, unless the parties agree to the contrary, the
law to be applied in the arbitration of the dispute is that of the host state. In
sum, "ICSID arbitration is very closely administered and supervised arbi-
tration which contains many safeguards, having particularly in mind the
position of States which are parties to proceedings."" 2 Accordingly, it may
provide a desirable alternative to institutional arbitration centers which are
sometimes perceived as having a Western bias.
African countries, for example, exhibit a strong tendency to submit dis-
putes to the ICSID." Many of these states played significant roles in the
conception and implementation of the Centre. Consequently they place a
good deal of confidence in its ability to provide a fair settlement of disputes.
It is this confidence in the system, born out of participation in its creation,
which may be indispensable to the success of arbitration in developing
countries. In 1972 for example, when the Ghanaian government dishonored
a number of its contracts with foreign investors, the government voluntarily
submitted to arbitration under the ICSID.
It is significant to note that even the ICSID, which seems to provide 3
sufficient safeguards to allay fears of an institutionalized Western bias, '
has been unable to attract Latin American countries to accede to the Con-
vention. This may in part be explained by Article 42(1) of the ICSID Con-
vention which suggests that, although the parties are free to choose what-
ever law they wish to govern the arbitration, the law chosen may be overri-
den by the Centre's application of the standards of international law."

"Remarks of A. Broches, Sixth Annual International Arbitration Congress, Mexico City

(March 1978). See Baker & Ryans, ICSID as a Little-known Solution to Investment Disputes in
High Risk Countries, AKRON Bus. & ECON. REv. 8 (1975).
"Many African governments are generally inclined to use arbitration as a dispute resolution
mechanism. Special provisions are often made in investment enactments or decrees for arbitra-
tion to resolve disputes arising from nationalization or withdrawals of concession rights.
Tiewul & Tsegah, Arbitration and the Settlement of Commercial Disputes: A Selective Survey
of African Practice, 24 INT'L & COMP. L. Q. 393, 397-98 (1975).
14Many Western investors have accused the Centre of having a "developing country" bias.
Ryans & Baker, The InternationalCentrefor Settlement of Investment Disputes(ICSID), 10 J.
WORLD TRADE LAW 65, 72 (1976).
"Abbott, Latin America and InternationalArbitration Conventions: The Quandary of
Non-Ratification, 17 HARV. INT'L L.J. 131, 138-39 (1976).
224 INTERNATIONAL LA WYER

Some Latin American countries believe this Article raises the possibility of
Western bias in the ICSID.
Because of the jurisdictional scope of the Centre, two major definitional
problems may arise. First, is the transaction in question an "investment" so
that the Centre may properly take cognizance of it? There may be cases in
which this question admits of no easy answer. Thus it would seem to be
advisable for the parties to characterize it as such in their agreement in order
to create a presumption in favor of the "investment" label in borderline
cases. 36
Second, is one party to the agreement a "state" so that the other jurisdic-
tional prerequisite of the ICSID may be met? This problem is particularly
acute if an agency or subdivision of a state is a party to the agreement.
Thus, when it is intended that a subdivision or agency of the host state be a
party to an agreement subject to ICSID arbitration, the host state must
designate that entity as a party to the agreement. Thereafter, papers submit-
ting disputes to the Centre must contain the consent of the subdivision or
agency and the consent of the subdivision or agency must be approved by
the host state.

A. SUBMISSION TO THE CENTRE

If the host state which is a party to an agreement is a member of the

Centre, the parties to the agreement may submit their dispute to the Centre
by including a clear statement in the agreement that disputes will be submit-
ted to the Centre. The parties should specify their choice of procedure since
the Centre offers both arbitration and conciliation services. The parties may
also choose a combination of the two.

B. COSTS
The appointed tribunal is empowered to determine its fees and expenses
within the limits set by the Administrative Council. If the parties object to
the fee limits set by the Administrative Council, they may suggest different
limits in their consent to submission. The arbitral tribunal has authority to
allocate the expenses between or among the parties, but the parties may
agree in advance on the manner of allocation.

C. PROCEDURE
The Centre provides arbitration rules which may be amended to suit the
particular needs of the parties. The procedural arrangements fashioned by
the parties are given great weight by the tribunal. If the parties do not
designate their own rules, they become subject to the Centre's rules as in
force on the date of the consent agreement.

6
1 See Amerasinghe, supra note 31.
 Arbitrationand Developing Countries

D. CHOICE OF ARBITRATORS
There must be an uneven number of arbitrators. A majority of the arbi-
trators must be from countries other than those of the parties. If the parties
are unable to agree on the selection of arbitrators within 60 days of the
initiation of the request for submission of the dispute, either party may
resort to the rules of the Centre on the appointment of arbitrators. These
rules provide for three arbitrators. Each party is to approve one of the
arbitrators and the third arbitrator is to be appointed by agreement of the
parties.

E. FINALITY
The tribunal's arbitral award is not subject to any appeal and this rule
cannot be changed by agreement. The host state must recognize the award
as binding and enforce it as if the award were a final judgment. Awards are
not published without the consent of the parties.

2. The ICC Court of Arbitration

In contrast to the ICSID, the ICC provides a non-specialized mechanism
for dispute settlement. Any type of international commercial dispute may
be submitted. The ICC Court of Arbitration provides the rules of concilia-
tion or arbitration and supervises the application of these rules by the
arbitrators."

A. COSTS
In ICC arbitration the arbitrator's fees and the administrative charges are
based not on the amount of work performed, but rather on the amount in
dispute. If the amount in dispute is large, the costs of arbitration will be
correspondingly high. In a $5 million dispute, for example, a single
arbitrator's fee could be as much as $62,000.

B. PROCEDURE
The rules of procedure in ICC arbitration are somewhat vague. The
parties often embark on an ICC arbitration totally unaware of matters such
as the permissible scope of discovery, if any, the right to a complete tran-
script of the oral proceedings, the right to present witnesses, both lay and
expert, and the right to both direct and cross-examination of such witnesses.

C. CHOICE OF ARBITRATORS
If the parties to an ICC arbitration fail to agree on the choice of the sole
arbitrator, the parties lose all control over the choice. The responsibility is

"RULES OF THE COURT OF ARBITRATION OF THE INTERNATIONAL CHAMBER OF COMMERCE

(1975).
226 INTERNATIONAL LA WYER

given by the Court of Arbitration to a national committee of a country

other than those of which the parties are nationals. After the committee's
choice is made, it is extremely difficult for the parties to challenge it. 8

D. TERMS OF REFERENCE
The drafting and execution of the terms of reference are required by the
ICC Rules. This document is designed to aid the arbitrators in their assess-
ment of the questions presented for resolution, but the preparation of the
terms of reference is an expensive and time-consuming procedure which
may become, in effect, a "mini-arbitration."

3. The American Arbitration Association

The facilities of the AAA offer yet another alternative to parties engaged
in international commerce.

A. COSTS
A significant difference between arbitration under the AAA and arbitra-
tion under ICC is cost. The AAA rules, unlike those of the ICC, place a
limit on administrative charges. 9 Moreover, the AAA scale of administra-
tive charges is substantially lower than that of the ICC since the AAA
administrative fee schedule stops at disputes involving claims amounting to
$5 million. Administrative charges for claims in excess of that amount are
negotiated with the AAA by the parties to the arbitration. Theoretically, the
AAA arbitrators serve without a fee. But if the arbitration is prolonged, the
parties normally agree to pay each arbitrator a fee. The arbitrator's fees in
AAA arbitration reportedly range from $250 to $1,000 a day per arbitrator.

B. RULES OF PROCEDURE
The AAA rules of procedure, in sharp contrast to those of the ICC, are
quite specific. A description of claims and defenses, proofs and witnesses
must be provided by both parties. Power to decide what evidence may be
introduced is shared by the parties and the arbitrators. Such choices are not
within the sole discretion of the arbitrators.
Section 28 of the AAA rules provides that "the complaining party shall
...present his claim and proofs and his witnesses, who shall submit to
questions and other examination. The defending party shall then present his
defense and proofs and his witnesses, who shall submit to questions or other

"A recent ICC Preliminary Award in Case No. 2321 (1974) illustrates this problem. The
defendants contested the propriety of the nomination of the arbitrator by the Court of Arbitra-
tion of the ICC which, they argued, had ignored their contractual provisions. The arbitrator
upheld his own appointment, stating, rather summarily, that since the parties' method of
appointment had proven ineffective, the arbitrator was properly appointed by the Court.
(1976) 1 Y.B. CoM. ARB. 133 (International Council for Commercial Arbitration).
"COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION (1977).
 Arbitration and Developing Countries

examination." Thus the parties may offer evidence which they deem essen-
tial to an understanding of the issues and any party may request that the
arbitrator issue a subpoena to compel the production of documents or
witnesses at hearings before the arbitrators if the arbitrator is authorized to
do so by the law of the forum.

C. CHOICE OF ARBITRATORS
Before appointing an arbitrator, the AAA consults the parties by sending
each party a copy of a specially prepared list of proposed arbitrators. In
international matters the AAA list usually contains ten names of persons
technically qualified to resolve the particular dispute involved. The list also
includes a description of each individual's business or professional affilia-
tions. If the parties wish to obtain additional information concerning a
proposed arbitrator, the AAA, unlike the ICC, will provide supplementary
biographic data.
The parties have seven days from the date of the mailing of the list to
return it with any names to which they object crossed off, and with the
remaining names marked in the order of preference. This procedure elimi-
nates all persons crossed-off by either party, and, from those who remain,
determines the person with the highest degree of mutual preference. That
person is then invited to be the arbitrator.
The AAA also has the power to appoint an arbitrator from its National
Panel, without the submission of any additional lists, if no arbitrator pre-
viously proposed is mutually acceptable, or the arbitrator chosen is un-
available. However, selection procedures are flexible and, if both parties
agree, the AAA will send the parties another list of proposed arbitrators.
The same procedure will then be repeated and the seven day limit is not
rigidly enforced.

D. TERMS OF REFERENCE
Unlike the ICC, the AAA Rules do not provide for the preparation of
terms of reference. The parties may submit, however, statements clarifying
the issues involved. The parties also help frame the issues by filing docu-
ments similar to the traditional complaint and answer used in American
courts of law.

4. Arbitration under the UNCITRAL Rules

The United Nations Commission on International Trade Law (UNCI-
TRAL) promulgated comprehensive arbitration rules which were adopted
by the General Assembly of the United Nations on December 15, 1976.40

"Sanders, Commentary On UNCITRAL Arbitration Rules, (1976) 2 Y.B. CoM. ARB. 172-73
(International Council for Commercial Arbitration).
228 INTERNA TIONAL LA WYER

These rules may be used to give structure to ad hoc arbitrations. How-

ever, they also envisage resort to an "appointing authority," such as an
existing arbitral institution or the Secretary-General of the Permanent
Court of Arbitration at The Hague, to resolve problems which cannot be
settled by the parties. Such problems may include the selection or replace-
ment of an arbitrator.

A. COSTS
Article 39 provides that "[t]he fees of the arbitral tribunal shall be rea-
sonable in amount, taking into account the amount in dispute, the complex-
ity of the subject matter, the time spent by the arbitrators and any other
relevant circumstances of the case."
There is no administrative fee as such, but the parties may be required to
bear additional fees and expenses if they resort to a third party to appoint
an arbitrator or if the Secretary-General of the Permanent Court of Arbi-
tration at The Hague incurs expenses arising out of the arbitration.
Additional costs, including travel and other expenses of the arbitrators,
witnesses and experts, as well as the legal costs of the successful party, may
be included within the arbitral award.

B. RULES OF PROCEDURE
The UNCITRAL Rules are similar to those of the AAA in that they give
either party the right to require, at any stage of the proceeding, "hearings
for the presentation of evidence by witnesses, including expert witnesses, or
for oral argument" (Article 15.2). The tribunal, however, retains the power
to determine the manner in which witnesses are examined.
The tribunal is also empowered to appoint experts to report to it on
specific issues, but the parties are entitled to examine any document upon
which the expert has relied in his report and to interrogate the expert at a
hearing. The parties may also present their own expert witnesses. The UN-
CITRAL Rules permit the parties to frame the issues by submitting written
statements of claim and defense. In these statements the parties set forth the
facts supporting their positions and may attach thereto any relevant docu-
ments. Submission of further written statements is within the discretion of
the arbitral tribunal. The tribunal also has the authority, at any time during
the arbitral proceedings, to require the parties to produce documents or
other evidence.

c. CHOICE OF ARBITRATORS
The UNCITRAL Rules permit the parties to participate in the selection of
the sole or third arbitrator. If the parties are unable to agree on a sole or
third arbitrator and cannot agree to name an appointing authority, either
party may ask the Secretary-General of the Permanent Court of Arbitration
at The Hague to designate an appointing authority. The appointing author-
ity must use a list procedure whereby the authority sends both parties an
 Arbitrationand Developing Countries 229

identical list containing three names. Within 15 days after receipt of the list,
each party must return the list, having deleted the name or names he objects
to and having ranked the remaining names in the order of preference. The
appointing authority will appoint the sole or third arbitrator from among
the names approved on the list. If the appointment cannot be made in this
manner, the appointing authority may exercise its discretion in appointing
the arbitrator.

D. TERMS OF REFERENCE
The UNCITRAL Rules do not provide for the preparation of any terms
of reference.

5. Rules of the Arbitration Institute of

the Stockholm Chamber of Commerce
A. COSTS
The final costs of SCC arbitration are somewhat unpredictable. There is
no administrative or arbitrators' fee schedule and the rules themselves do
not state the basis for determining such costs. Should a settlement be made
before-an award is rendered, the arbitral tribunal has power to decide that
the parties must pay a reasonable amount as compensation to the SCC and
the arbitrators. If the settlement is made before the arbitral tribunal has
been appointed, the Institute will determine its own compensation. The
tribunal can also apportion costs in its final award. Little guidance is pro-
vided as to the method of fixing the costs.

B. RULES OF PROCEDURE
The SCC Rules, like those of the ICC, give the arbitrator great discretion
to choose among various procedural approaches. The rules do state that the
Swedish law of arbitration" shall apply and that oral procedure is to be the
norm. The rules also require that the issues in dispute, as well as the evi-
dence to be offered by each party, be described in writing before any hear-
ing by the tribunal.
Although the matter is not specifically addressed by the SCC Rules,
Swedish law gives arbitrators the power to appoint experts on their own
initiative. However, the arbitrators have no power to summon witnesses to
appear before the tribunal or to sanction a party if that party refuses to
produce evidence called for by the arbitrators. As a practical matter, the
arbitrators may assign evidentiary weight to a refusal to produce such evi-
dence. If a party wishes to compel testimony or production of a document
or an object, he must apply to the appropriate District Court.

"The Arbitration Act of 1929, as amended, July i, 1976. See Holmback & Mangird,
Sweden, [1978] 3 Y.B. COM. ARB. 161 (International Council for Commercial Arbitration).
230 INTERNA TIONAL LA WYER

C. CHOICE OF ARBITRATORS

The chairman of the arbitral tribunal or a sole arbitrator is always ap-

pointed by the SCC under the rules. The SCC Rules make no provision for
the parties to participate in this selection process.

D. TERMS OF REFERENCE
There is no provision in the rules for the preparation of any terms of
reference. The claimant must submit a written request for arbitration con-
taining a brief account of the dispute and a statement of claim which should
include a statement of the claimant's principal evidence. The respondent
must submit a reply to the request for arbitration containing a brief com-
ment on the request and a defense which should include a statement of
respondent's principal evidence and any counterclaims.

VI. Drafting the Arbitration Clause:

Practical Considerations
Once counsel is familiar with the social, cultural, religious and political
history and attitudes of the developing country and the rules of the various
international arbitration systems, he should be equipped to draft an effec-
tive arbitration clause. Some of the central issues to be considered in this
regard are:
1. the definition of the disputes which will be arbitrable;
2. the method for selection or appointment of arbitrators; and
3. the substantive and procedural law/rules which will govern the arbi-
tration." 2
If the parties mean to provide for arbitration as the sole remedy for any
dispute arising out of the agreement in issue, this intent must be made
explicit in the agreement. 3 A general statement that the parties agree to
submit any and all disputes to arbitration is not sufficient for this purpose."
Similarly, if the parties wish to arbitrate only limited questions, the arbitra-
tion clause should explicitly so provide.
The parties may utilize their own method of selecting arbitrators or they
may rely on the rules promulgated by some institutional arbitration center.
This choice is particularly important since it will indirectly affect the result
of the arbitration process. Under the ICC Rules, for example, the parties
may agree to select a sole arbitrator, or to nominate, respectively, one

'"SeeAksen, A PracticalGuide to InternationalArbitration, in PRIVATE INVESTORS ABROAD

51 (1976). There are several collateral matters to be considered: (1) the form of the award; (2)
the language of the written submissions and the oral proceedings; (3) the qualifications re-
quired of arbitrators not selected by the parties; (4) the consent to the entry of judgment upon
the award; (5) the possible limitation of the fees and expenses otherwise applicable, and (6) the
forum
3 of the arbitration.
4 Ehrenhaft, Effective International Commercial Arbitration, 9 LAW & POL'Y INT'L. Bus.
1191, 1195 (1977).
44"d.
 Arbitration and Developing Countries 231

arbitrator each. A third arbitrator, the Chairman of the tribunal, is then

selected by the Court of Arbitration or by the national committee desig-
nated by the Court. The parties are free to vary these rules by providing that
the third arbitrator will be nominated by the two other arbitrators within a
fixed period of time."
The Chairman of the tribunal normally plays a critical role in the pro-
ceedings. If no majority decision is reached, he alone will render the arbitral
award. It has been argued that where the parties are represented by counsel,
the appointment of three arbitrators is unnecessary, uneconomical and inef-
ficient. 6 On the other hand, if each party feels that it is directly represented
in the decision-making process, both parties may be more willing to comply
with the arbitral award. In selecting the arbitrators, the parties should
carefully consider the impact of other factors such as the governing substan-
tive law, the language of the agreement at issue, the principal underlying
documents, the forum of the arbitration, the nature of the dispute and the
type of expertise which may be required to understand the major issues.
The parties may determine the governing substantive law to be applied in
the arbitration. If no such provision is made in the agreement, the arbitra-
tors may apply the substantive law indicated by the appropriate conflict of
law rules. This may result in the application of general rules of law consid-
ered common to civilized nations. In addition, since the procedural law
applied in the arbitration is often influenced by the choice of the forum for
the arbitration, that choice is extremely important. The applicable proce-
dural rules, often combined with certain mandatory provisions of the
forum's procedural law, may affect critical questions such as the right to
present witnesses, the use of direct and cross-examination, pre-hearing dis-
closure of relevant evidence, the scope of expert testimony and the right to a
verbatim transcript of all oral proceedings.

VII. Conclusion
Arbitration involving parties from developing countries will only work
effectively if it is tailored to satisfy the needs and legitimate expectations of
all parties. Many developing countries view existing forms of international
arbitration as mechanisms which primarily serve the interests of Western
entities. Unless the developing countries are reasonably persuaded that arbi-
tration will fairly protect their interests, its potential will remain unrealized
in the developing world.
Existing international arbitration institutions, already attempting to
broaden their focus, are in an excellent position to see that the potential for
increased resort to arbitration is more fully realized.

'3McLaughlin, InternationalArbitration, in ALI-ABA COURSE OF STUDY: CONSTRUCTION

CONTRACTING IN THE MIDDLE EAST (1978).
'Ehrenhaft, supra note 43, at 1201.
232 INTERNA TIONAL LA WYER

The regionalization of traditional arbitration centers, now located princi-

pally in Western Europe, would be an important step in enhancing the
image of arbitration in developing countries. Such centers would attract
more arbitrators from developing countries and, in this manner, the arbitra-
tion panels ultimately selected should be better balanced. Moreover, given
the significance of the choice of the forum for the arbitration, such regional
centers would offer developing countries the opportunity to participate in
arbitrations in which the procedural rules would be more familiar to them.
This regionalization should be accompanied by full-scale attempts to create
a genuine partnership between the national judiciary and the arbitration
centers.
Arbitration's enormous potential for efficient dispute resolution on a
truly consensual basis rests, in large part, upon the initial freedom of the
parties to choose the substantive and procedural law governing the ultimate
proceedings. This unique feature of arbitration can be lost by poor planning
and careless drafting. Careful planning and drafting, however, make it
possible for the parties, including those who identify with the concerns of
the developing nations, to avoid many of the pitfalls otherwise associated
with international arbitration and to ensure that the consensual nature of
arbitration is preserved while its reputation for impartiality is enhanced.