Mattli PrivateJusticeGlobal 2001

Private Justice in a Global Economy: From Litigation to Arbitration
Author(s): Walter Mattli

Source: International Organization , Autumn, 2001, Vol. 55, No. 4, The Rational Design
of International Institutions (Autumn, 2001), pp. 919-947
Published by: The MIT Press
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Private Justice in a Global Economy:
From Litigation to Arbitration
Walter Mattli
The study of private settlement of cross-border trade and investment disputes

through international commercial arbitration or other mechanisms has been much
neglected by scholars of international political economy and international institu-
tions. This oversight is attributable in part to the traditional focus of international
relations on intergovernmental international organizations and the lack of attention
to private international institutional arrangements.1 A further reason for the over-
sight is that arbitration is resolutely private, making information exceedingly
difficult to obtain. Two distinguished international arbitrators, Alan Redfern and
Martin Hunter, recently observed that the study of the practice of international
commercial arbitration is like peering into the dark. Few arbitral awards are
published and even fewer procedural decisions of arbitral tribunals come to light.2
Despite this difficulty, private forums for international commercial dispute
resolution, of which international arbitration is an increasingly popular type, deserve
much closer attention by scholars of international relations. After virtually disap-
I am grateful to Ken Abbott, Beth Yarbrough, Barbara Koremenos, Charles Lipson, Ronald Mitchell,
Antonio Ortiz, and Duncan Snidal for excellent comments on earlier drafts. I also thank Debbie
Davenport, Miles Kahler, Robert Keohane, Lisa Martin, Jeffrey Stacey, and the participants of the
Rational Design project, the Program on International Politics, Economics, and Security (PIPES) at the
University of Chicago, and a seminar at Harvard University Business School for helpful suggestions.
Special thanks to Dominique Hascher, General Counsel and Deputy Secretary General of the Interna-
tional Court of Arbitration of the International Chamber of Commerce in Paris, for inviting me to do an
internship at the court in 1998, and to Anne-Marie Whitesell for welcoming me to her legal team at the
court. I benefited greatly from discussions on international commercial arbitration with Adrian Winstan-
ley of the London Court of International Arbitration, Eva Miiller of the Arbitration Institute of the
Stockholm Chamber of Commerce, as well as Gerald Aksen, Lucienne Carasso Bulow, Alessandra
Casella, Yves Dezalay, Bryant Garth, Thomas Heller, Christian Joerges, William Park, Susan Rose-
Ackerman, Martin Shapiro, Anne-Marie Slaughter, Hans Smit, Francis Snyder, Job Taylor, and Raymund
Werle.
1. Two notable exceptions are Lipson 1985; and Cutler 1995.
2. Redfern and Hunter 1991, xv. Information mainly comes from tapping the experience of the
principal arbitral institutions or by looking at individual cases that come before the courts, either as a
result of enforcement proceedings or because an arbitral award is challenged by the losing party.
International Organization 55, 4, Autumn 2001, pp. 919-947

? 2001 by The IO Foundation and the Massachusetts Institute of Technology

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920 International Organization
pearing during the age of nation-state ideology in the nineteenth century, interna-
tional commercial arbitration has been staging a formidable comeback in the past
twenty years. Today's scene calls to memory the flourishing era of arbitration
practices and institutions associated with the international trade fairs of medieval
Europe. The number of arbitration forums has grown from a dozen or so in the
1970s to more than one hundred in the 1990s, and the caseload of major arbitral
institutions has more than doubled during the same period.3 Lawyers and judges
agree that "there is [now] clear evidence of something of a world movement ...
towards international arbitration."4 The Economist recently called arbitration "the
Big Idea set to dominate legal-reform agendas into the next century."5
Even though the focus of this study is on various arbitration options, it also
reflects more broadly on the market of institutions for international commercial
dispute resolution for private parties. It addresses the question of why different
forums for dispute resolution are selected.
In the domestic context parties who seek a binding method of resolving disputes
through third-party intervention have the choice between a national public court and
private arbitration. In the international context such a choice does not exist because
there are no international public courts that handle international commercial dis-
putes involving only private parties.6 Therefore, the choice for international private
parties is between recourse to a national court (that is, litigation) and recourse to
private international dispute resolution, namely international commercial arbitration
or so-called alternative dispute resolution (ADR) techniques, such as conciliation
and mediation.7
Arbitration is a binding, nonjudicial, and private means of settling disputes based
on an explicit agreement by the parties involved in a transaction. Such an agreement
is typically embodied in the terms of a contract between the parties. Alternatively,
if the contract is silent about the dispute-resolution method, the parties can select the
method when the dispute arises.8 Arbitration entrusts the settlement of a question to
one or more persons who derive their powers from the private agreement.9 Unlike
judges in public courts, who must follow fixed rules of procedure and apply the laws
of the land, arbitrators can dispense with legal formalities and may apply whatever
procedural rules and substantive law best fit a case.
3. Brown 1993.
4. Kerr, Lord Justice of England, preface to Craig, Park, and Paulsson, 1990, xii.
5. The Economist, 18-24 July 1992, 17, survey on the legal profession. See also Wetter 1995.
6. The only exception is the European Court of Justice, which may deal with certain disputes be
private parties under European Community law. Redfern and Hunter 1991, 25; Burley and Mattli 1
Mattli and Slaughter 1995 and 1998a,b.
7. The term jurisdiction clause in an international contract is generally used to describe a fo
selection that designates a public court to hear a case, while an arbitration clause refers to pr
international dispute resolution.
8. Even if the parties have contractually agreed to use one method, they may switch to another if
feel that the latter is more appropriate for a given dispute.
9. Mustill and Boyd 1989, 38-50.

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Private Justice in a Global Economy 921
Arbitration becomes international when the parties to a dispute reside or conduct

their main business in different countries. The term commercial in international
commercial arbitration is broadly conceived and covers activities such as sale of
goods, distribution agreements, commercial representation of agency, leasing,
consulting, transportation, construction work, joint ventures, and other forms of
industrial or business cooperation.10
International commercial arbitration can be conducted in two ways, as ad hoc
arbitration or as institutional arbitration. Ad hoc arbitration does not rely on the
supervision or formal administration of an arbitration center. Institutional arbitra-
tion, in contrast, is done under the aegis of an arbitral center, usually according to
the institution's own rules of arbitration.1 The most established of these institutions
are the International Court of Arbitration (ICA) of the International Chamber of
Commerce (ICC), the London Court of International Arbitration (LCIA), and the
Arbitration Institute of the Stockholm Chamber of Commerce (SCC Institute).12
Many more arbitral institutions have been set up in the past decade, notably in Asia,
the Middle East, and North America.13
I argue that the various forums of dispute resolution can be understood as indirect
products of rational selection where actors select those institutions that are most
effective and appropriate for given disputes. In the United States, for example, the
legal counsels of major corporations have spearheaded the recent trend away from
sometimes cumbersome and lengthy court proceedings toward faster and less
expensive methods, such as ADR. Similarly, the surge in popularity of arbitration as
a means of international commercial dispute resolution can be attributed to features
of arbitration that the international business community values for a growing
number of disputes, notably in the areas of technology transfer, intellectual property,
engineering, and construction. These features include flexibility, technical expertise,
privacy, confidentiality, and speed. In short I describe a market of dispute-resolution
methods where different "suppliers" offer different venues from which the firms on
the demand side can select based on their design problems. This creates an
accelerated evolutionary process of forum formation (that is, accelerated by rational
10. This definition is suggested in the United Nations Commission for International Trade Law
(UNCITRAL) Model Law, Art. 1 (1), fn.
11. Institutional arbitration is also referred to in the literature as "administered" or "supervised"
arbitration. On institutional arbitration, see Slate 1996; Hoellering 1994; Vigrass 1993; Graving 1989;
and Lowenfeld 1993.
12. Another major institution is the American Arbitration Association. Its focus is primarily on
domestic arbitration; for this reason, it is omitted from the discussion in this study. (Yearly, it handles
about forty thousand domestic and two hundred international arbitration cases.)
13. Due to limited space, I focus primarily on international commercial arbitration and not the more
specialized arbitration as offered, for example, by the Society of Maritime Arbitration (New York), the
Grain and Feed Trade Association (London), and various stock and commodity exchanges. Nevertheless,
I would argue that the framework used here does shed light on some key institutional features of
commodity trade and maritime arbitration. See also Mentschikoff 1961; Harris, Summerskill, and
Cockerill 1993; Summerskill 1993; Covo 1993; and Johnson 1991 and 1993.

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anticipation of what will sell and what will work), and the result will be very much
the same as a direct rational-design effort.14
The key institutional dimensions along which the various methods of interna-
tional dispute resolution vary are (1) procedural and adaptive flexibility, and (2)
centralization of procedural safeguards and information collection. For example,
flexibility is typically much lower in public court proceedings than in institutional
arbitration, ad hoc arbitration, or ADR; and centralization is present in institutional
arbitration but not in ad hoc arbitration or ADR.
Drawing on the analytical framework developed by Barbara Koremenos, Charles
Lipson, and Duncan Snidal, I elaborate on several of the Rational Design conjec-
tures, linking the institutional features of dispute-resolution methods to the needs or
demands of private parties.15 These conjectures can be summarized as follows:
Centralization of forums to which private international parties resort to resolve their
disputes increases with uncertainty about the parties' preferences or behavior
(conjecture C1, CENTRALIZATION increases with UNCERTAINTY ABOUT BEHAVIOR). Such
uncertainty may be low, for example, if the parties are locked in a mutually
beneficial, ongoing commercial relationship; in this case, the parties' institutional
demands for resolving disputes will be markedly lower than those of firms with few
interactions and little knowledge of each other.
However, full information and adequate knowledge are not always sufficient to
ensure compliance; enforcement problems may remain severe if the payoff from
unilateral defection is significantly greater than that from mutual cooperation at the
dispute-resolution stage. In this case, strong centralized procedural safeguards will
be necessary to foil defection. This argument is summarized in conjecture C4,
CENTRALIZATION increases with ENFORCEMENT problems.
Centralization is also likely to increase with the parties' uncertainty about the
state of the world (conjecture C2, CENTRALIZATION increases with UNCERTAINTY ABOUT
THE STATE OF THE WORLD)-that is, with the parties' relative lack of information, for
example, about the legal environment (the laws and integrity of judges) in which
arbitration takes place and about the conditions for enforceability of arbitral awards.
More generally, traders with little experience in international exchange or traders
from very different cultural and linguistic regions may rely more heavily on
centralized support and expertise for resolving their disputes than veteran traders
operating in a relatively homogenous region.
Finally, uncertainty about the state of the world may also result from the
susceptibility of an issue-area to new developments or unanticipated shocks that
may leave parties in uncharted legal territory. In such situations institutional
flexibility may be required to resolve disputes effectively. For example, firms
operating at the forefront of new production and exchange methods are likely to
14. As illustrated later, the distinction between suppliers and demanders is useful analytically, but in
practice it is often blurred because methods for resolving private disputes are provided mostly by private
organizations run and funded by firms themselves.
15. Koremenos, Lipson, and Snidal, this volume.

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prefer a flexible form of dispute resolution that allows them to tailor rules regarding
procedure, evidence, and even the substance of the case to their evolving needs. This
relationship is captured by conjecture Fl, FLEXIBILITY increases with UNCERTAINTY
ABOUT THE STATE OF THE WORLD.
The study is organized as follows. In the first section I briefly re

themes in the institutional literature in international relations and economics that are
relevant to this study. In the second section I discuss the key institutional differences
among the various methods of international commercial dispute resolution and
introduce the principal international arbitral forums. After laying this groundwork I
seek to explain within the Rational Design framework why private parties select the
dispute-resolution forums they do. I conclude with a discussion of ways to broaden
the study.
Private Dispute Resolution and the Institutional Literature
Political scientists and economists have developed two theoretical schools, regime
theory and new institutional economics (NIE), respectively, that seek to explain
institutional arrangements. Unfortunately, the two schools have based their theories
in part on assumptions that move the theories' reach away from the types of
institutional arrangements discussed in this study.
"International regimes" are defined broadly as sets of implicit or explicit princi-
ples, norms, rules, and decision-making procedures around which actors' expecta-
tions converge in a given area of international relations.16 In a world of rapidly
growing interdependence regimes are said to help states correct "market failures"
stemming from asymmetric information, moral hazard, risk, and uncertainty.17
Regime theorists have shed important light on the nature of interstate relations, but
they have overlooked the importance of nonstate actors in international relations. In
particular they have failed to examine the extent to which international market
players themselves can remedy "market failures" by creating private institutional
arrangements. This omission has deprived the theory of the comparative institu-
tional perspective necessary to assess the desirability of intergovernmental regimes.
Only a comparative institutional analysis that weighs the costs and benefits of both
private and public institutional remedies of "market failures" can provide a frame-
work to address questions of efficiency, effectiveness, and optimal institutional
design.18 I am not implying that regime theory is flawed but rather suggesting that
the theory could be strengthened by extending its focus beyond state behavior. For
example, there is nothing that keeps the ICC from being viewed as a regime for its
members, as I show later.
16. Krasner 1983, 2.

17. Keohane 1984, 93.
18. A related point is made in Demsetz 1969.

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NIE is a rapidly growing field that has developed from the pioneering work of
Oliver Williamson. It offers a rigorous conceptual framework for comparative
institutional analysis.19 NIE seeks to explain varying types of industrial organiza-
tion, from straightforward market exchange to vertically integrated exchange, based
on differences in transaction costs. The principal dimensions within which transac-
tions differ are asset specificity, uncertainty, and frequency. The first is the most
important; it represents the degree to which durable investments are made to support
particular transactions.
NIE postulates that transaction costs are economized by assigning transactions
(which differ in their attributes) to governance structures (which differ in their
adaptive capacities and associated costs) in a discriminating way. Governance
structures are the organizational frameworks within which the integrity of a
contractual relation is decided and maintained. In particular, the higher the asset
specificity, the greater the institutional complexity needed to promote efficient
exchange. Examples of governance structures are economic hostages, vertical
integration, unitization, and multinationalism.20
Nevertheless, Williamson's framework is not without shortcomings. For exam-
ple, none of Williamson's governance structures would be needed if courts could
resolve disputes swiftly and inexpensively. But Williamson argues that court
ordering or legal centralism is inefficient. "Most studies of exchange assume that
efficacious rules of law regarding contract disputes are in place and are applied by
the courts in an informed, sophisticated, and low-cost way.... The facts, however,
disclose otherwise. Most disputes, including many that under current rules could be
brought to a court, are resolved by avoidance, self-help, and the like.... [And]
because the efficacy of court ordering is problematic, contract execution falls
heavily on [governance structures]."21 This proposition is problematic. First, courts
are institutions, too. A comparative institutional analysis that sets aside a large
universe of institutions on the grounds of their alleged inefficiency risks being
internally inconsistent. Within Williamson's framework, it is incomprehensible why
inefficient institutions come into being or survive. Second, even if it established
analytically (by way of ad hoc assumptions) that public courts and public law are
inefficient, there remains the question of why NIE does not consider their next best
substitutes, namely private courts and private law.
In short, NIE provides a sophisticated analytical framework for studying varying
forms of governance. However, by overlooking the importance particularly of
private courts and law, NIE may be accused of truncating the full range of variation
on the dependent variable (governance forms) and thus suffering from selection
bias. Williamson recognized that "a place for law [should] properly [be] provided in
19. Williamson 1975 and 1985.

20. Yarbrough and Yarbrough have recently added to this list various forms of trade liberal
Their analysis provides a good example of how NIE can enrich the study of international insti
arrangements. See Yarbrough and Yarbrough 1992.
21. Williamson 1985, 20, 32.

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any comprehensive study of contract."22 Beth Yarbrough and Robert Yarbrough

have responded to this invitation and are presently extending Williamson's frame-
work to incorporate law and public courts in a way that is consonant with the
analysis offered in this study. Courts, they argue, are not generically inefficient;
rather they are not very efficacious for certain types of transactions. One type is
those transactions in which asset specificity makes the historical context of a
relationship critical to resolving disputes. A second type is those in which the
confrontational nature of court proceedings risks damaging future relations (hence
courts' historical reluctance, until recently, to become involved in many family
matters). In such cases, Yarbrough and Yarbrough predict noncourt means of
dispute settlement.23
Institutional Features of International Commercial Dispute-

resolution Methods
The range of methods for resolving international commercial disputes is wide. It

includes litigation in public courts, several arbitration options, and so-called ADR
techniques. In this section I highlight the institutional characteristics of the vario
methods.
Flexibility in Dispute Resolution
A key feature of arbitration is its high degree of procedural flexibility. Arbitration

provides the parties with full control over the arbitral process. The parties may
decide the number of arbitrators comprising the arbitral tribunal, the appointment
procedure of the arbitrators, the place of arbitration, the powers of the tribunal, and
the applicable law in the dispute. In contrast, a trial before a national court must be
conducted in accordance with the rules of that court. Further, public court proceed-
ings are typically open to the public, and court decisions are published and readily
available. Arbitral proceedings, however, are held in private; details about the cases,
including the arbitral awards, are confidential.24 Privacy may help firms to hide a
number of facts from competitors and the public in general, such as trade secrets and
know-how not guaranteed by patents or financial difficulties and other problems.
Nevertheless, the parties may choose to publicize arbitral decisions either to create
precedents or to provide authoritative interpretations of standard contract terms.25
22. Ibid., 168.

23. Beth Yarbrough, pers. comm. with the author.
24. Rene David, a leading French expert of international arbitration, notes that "secrecy, which is one
of the reasons why arbitration is resorted to by the parties, is easily extended ... to everything concerning
arbitration." See David 1985, 31.
25. Cost is a factor, unrelated to flexibility, that is frequently said to distinguish litigation from
arbitration. Arbitration centers, for example, claim that litigation is much more expensive than arbitra-
tion. This need not necessarily be true, however. First, although litigants do not pay the salary of a judge,

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Flexibility characterizes not only arbitral procedures but also the actual institu-
tions of arbitration, such as the ICA, the LCIA, and the SCC Institute. These forums
can respond much more quickly to demands for new dispute-resolution rules and
services than public courts. The reason is evident: Private courts are demand driven.
The very same market actors who request new rules also control these courts. As
noted by Alessandra Casella, these forums are shaped from the "bottom," that is, by
the firms that voluntarily finance and share the "club goods" they need.26 Thus the
demanders are also the suppliers; they possess full information on how new business
practices or changing market conditions affect their dispute-resolution needs. They
are capable of quickly responding to new needs by creating new services and by
rewriting the charters of their courts. The frequent revisions of the rules of major
arbitral institutions attest to the high degree of institutional flexibility of these
forums.
Many of today's arbitration practices evoke medieval Europe's private courts and
the Law Merchant, a body of private commercial rules and principles that were
distinct from the ordinary law of the land. The merchant courts sat in fairs, markets,
seaport towns, and most other large centers of commercial activity. Merchant courts
chose as judges merchants who possessed intimate knowledge of particular com-
mercial practices and techniques. W. Mitchell, a historian of the Law Merchant,
writes, "The summary nature of its jurisdiction ... characterized the Lex Mercato-
ria. Its justice was prompt ... [and] the time within which disputes [had to] be
finally settled was narrowly limited."27 Sea merchants, for example, demanded that
disputes be settled "from tide to tide according to the ancient law marine and ancient
customs of the sea ... without mixing the law civil with the law maritime."28
Another reason for using guild courts was that "under severest penalties, [the guilds]
forbade members to appeal, in cases where they alone were concerned, to any court
save that of the guild."29 Merchant courts relied on sanctions such as ostracism and
boycott of all future trade to ensure that traders would be held to the resolution
dictated by the arbiters.30
Besides arbitration and litigation, there are ADR techniques. The most widely
known forms of these are conciliation and mediation. Like arbitration, conciliation
and mediation offer the parties great procedural flexibility. The parties pick
parties involved in arbitration must pay the fees and expenses of the arbitrators. Second, litigants are not
charged for using the public facilities of the courts of law, but the parties in arbitration pay the
administrative fees and expenses of an arbitral institution and these can be substantial, particularly when
they are assessed by reference to the amount in dispute. In short, arbitration may or may not be less
expensive than litigation; much depends on the specifics of the case and the attitudes of the parties to a
dispute. Consequently, in the analytical part of the study I do not consider cost as an institutional
dimension.
26. Casella 1996; see also Dezalay and Garth 1996.
27. Mitchell 1904, 12-13.
28. Ibid., 20.
29. Ibid., 42.
30. Benson 1989. See also Milgrom, North, and Weingast 1990; Greif, Milgrom, and Weingast 1994;
and Cutler 1995.

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conciliators or arbitrators of their choice and design procedures that best fit their
cases. Typically, a mediator seeks to reduce the distance between the parties'
positions and make the parties understand each other's point of view, in order that
they may achieve a compromise solution. A conciliator performs a different
function. After consulting all sides and evaluating the evidence, the conciliator
draws up the terms of a solution that is hopefully acceptable to all parties involved
in the dispute. Conciliation and mediation differ in one important respect from
arbitration: they do not result in a binding or enforceable award. A mediator cannot
compel the parties to reach a settlement, and a conciliator has no power to impose
a compromise solution on the parties.31
Centralization of Forums for Resolving Disputes
International commercial arbitration can be conducted in two ways, as institutional

arbitration or ad hoc arbitration. Ad hoc arbitration differs from institutional
arbitration in that it does not rely on the supervision or formal administration of
arbitration center. In this sense it is the least institutional form of arbitration. In ad
hoc arbitration, the parties are "on their own"; they are not bound by time limits set
by arbitral institutions, and their proceedings are not monitored by any central body.
The parties can leave the issuance of arbitration procedures to their arbitrators or
develop their own rules and design their own arbitral management either in the
initial contract or after a dispute has arisen. Alternatively, the parties may simply
adopt or adapt the rules of one of the major arbitration centers but, again, without
entrusting the administration of the arbitration to such centers.32 Another increas-
ingly popular option is to use the arbitration rules of the UN Commission on
International Trade Law of 1976 (UNCITRAL arbitration rules). Reference in the
parties' contract to the UNCITRAL rules will immediately incorporate a full-blown
set of procedures designed specially for ad hoc arbitration.33
Ad hoc arbitration to resolve international commercial disputes is similar to ADR
in that neither the mediator nor the conciliator is monitored by any central
institution. Like the mediator and conciliator, the arbitrator in an ad hoc case
depends entirely on the good will of the parties for a smooth process of dispute
resolution. Ad hoc arbitration and ADR contrast sharply with institutional arbitra-
tion as offered, for example, by the ICA, where the provision of procedural
safeguards and information is highly centralized. They also differ from arbitration
as conducted by the LCIA, and the SCC Institute. These three institutions are
31. For this reason, ADR is sometimes combined with an adjudicatory process as a fall-back solution.
For example, a contract may provide for a specific time limit to start some form of mediation or
negotiation after which arbitration becomes the only method available. Park 1997b.
32. In ad hoc arbitration, parties may rely nevertheless on an "appointing authority" (for example, a
court, an arbitral institution, or the chairman of a trade association) to appoint arbitrators.
33. On ad hoc arbitration, see Aksen 1991; and Arkin 1987.

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TABLE 1. Institutional dimensions of methods for resolving international

commercial disputes
Litigation Institutional arbitration Ad hoc arbitration

(public courts) (ICA, LCIA, SCC) and ADR
Flexibility Low (typically) High High

Centralization
Centralized information N.A. High to medium None
gathering
Centralized monitoring and N.A. High to medium None
other safeguards
considered in order.34 Table 1 summarizes the key institution

which the various methods of international commercial dispute
Illustration of Institutional Arbitration: Three Private Forums
International Chamber of Commerce Arbitration. The ICC is a business

organization offering a wide range of services to firms engaged in internationa
and investment, including commercial dispute resolution. Founded in 19
counts today as members over 7,000 enterprises and commercial organizatio
114 countries. Its organizational structure includes a general secretariat in P
employing some eighty-five persons and a secretary-general. The supreme org
the council, which meets twice a year. Members of the council are appointed
national committees of the ICC. Each committee may select one to three me
according to its contribution to the ICC budget. The council's president is elect
a two-year term. The ICC has established several commissions and specia
mittees to address major issues relating to international commerce, such as
lectual property, competition law, taxation, transportation, telecommunication
environment, and bribery. Annual conferences are supplemented every three
by an ICC Congress, attended on average by some one thousand participants
A major organization within the ICC is the ICA, established in 1923.36 The
of such a court was conceived after World War I by businessmen wrestling wi
practical difficulties of designing a dispute-resolution process acceptable to
34. Most of the information about these forums comes from interviews I conducted duri
internship at the ICA and visits to the LCIA and the SCC in March and April 1998.
35. Craig, Park, and Paulsson 1990, 25-27.
36. Before 15 June 1989, the court's name was Court of Arbitration of the International Cham
Commerce.

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chants of different national backgrounds.37 It is composed of a chair, eight

vice-chairs, and fifty-seven members selected by the ICC national committees and
professional organizations. The members are professors, former judges, barristers,
and lawyers with expertise in international commercial law and arbitration. They
represent a wide range of legal traditions, including civil law, common law, and
Islamic law. The ICA meets four times a month, once in plenary session and three
times as comite restraint. The ICA is assisted by a secretariat located at ICC
headquarters in Paris. The secretariat has a staff of thirty-eight people, including six
teams of lawyers from various countries. It assumes responsibility for the day-to-day
administration of ICA cases and keeps copies of all written communications and
pleadings exchanged in the arbitration proceedings. It also provides assistance and
information to parties, counsel, and arbitrators. The provision of centralized infor-
mation is a particularly valuable service because in an international arbitration case
many different national systems of law may need to be consulted, depending on
where the arbitration takes place and what issues are involved. National arbitration
laws may determine questions of the capacity of the parties to agree to arbitration,
the validity of the arbitration agreement, the "arbitrability" of the subject matter of
the dispute, and the recognition and enforcement of arbitral awards.38
ICC arbitration is characterized not only by a high degree of centralized infor-
mation gathering but also by the extensive monitoring offered by the ICA. Arbi-
tration proceeds in five steps:
1. The claimant submits a request for arbitration to the secretariat, and the
secretariat transmits the request to the defendant, who must respond within
thirty days.
2. The court appoints arbitrators and when the parties do not make their own
selection chooses the place of arbitration.39 In selecting the arbitrators, the
court relies in part on recommendations from the ICC national committees.
The court also fixes the arbitrators' fees and estimates the overall arbitra-
tion costs based on the amount in dispute. After receiving half of the ad-
vance on arbitration costs, the secretariat transmits the file to the arbitral
tribunal. The fixing of fees by the court is intended to prevent the parties
from being placed in the uncomfortable position of having to negotiate is-
sues of remuneration with those who will be responsible for deciding their
case or otherwise to avoid challenges to an arbitrator's independence.
37. Craig, Park, and Paulsson 1990, xxi. The ICA is supplemented by four other ICC bodies dealing
with the settlement of international commercial disputes. They are the Commission on International
Arbitration, which advises on the development of ICC Rules of Conciliation and Arbitration; the
International Maritime Arbitration Organization; the International Center for Technical Expertise; and
the Standing Committee on Regulation of Contractual Relations, which gives parties the possibility of
referring to a neutral outsider to adjust contracts whose performance is threatened by fundamentally
changed circumstances. See Craig, Park, and Paulsson 1990, 27-28.
38. Redfern and Hunter 1991, xvi. See also Gentinetta 1973.
39. ICC arbitral tribunals are composed of one or three arbitrators.

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3. Within two months of receiving the file, the tribunal submits a document
called the "Terms of Reference to the Court." This procedure for arriving at
the terms can be compared to a prehearing conference, where the arbitrators
get to know each other and become familiar with the specifics of the case.
The document summarizes the parties' respective claims, states the applica-
ble law and the place of arbitration, and specifies the procedural rules (for
evidence, witness statements, and so on) The court checks the Terms of
Reference for conformity with ICC rules.
4. As soon as the second half of the advance is paid, the arbitral tribunal pro-
ceeds with the case. Within six months (which the court may extend), the
tribunal submits a draft award to the court.
5. The court scrutinizes the arbitral award. The court may draw the arbitrators'
attention to points of substance or may suggest modifications to the form of
the award.40 Once the court is satisfied, it approves the award, and the sec-
retariat notifies the parties.
The docket of the ICA reflects the growing popularity of ICC arbitration. The first
three thousand requests for arbitration were filed between 1923 and 1977. The next
three thousand were lodged between 1977 and 1987. In 1991 alone, 333 cases were
filed; the yearly number of cases kept growing steadily, reaching 450 in 1997.41
About 54 percent of the 5,666 parties involved in ICC arbitration are from Western
Europe. The most frequently represented nationalities are, in order, France, United
States, West Germany, Italy, United Kingdom, Switzerland, Yugoslavia, Nether-
lands, Belgium, Egypt, Spain, Austria, Rumania, Sweden, and Greece. A recent
development is the upsurge of ICC arbitration involving parties from Eastern
Europe, Latin America, and South East Asia (7.9, 11.5, and 9.5 percent, respec-
tively, of all parties in 1996).42
The London Court of International Arbitration. The LCIA, another long-

established arbitration institution, was inaugurated in 1892 as the London Chamber
of Arbitration on the initiative of the Corporation of the City of London and the
London Chamber of Commerce and Industry. In 1903 the tribunal's name was
changed to the London Court of Arbitration. A joint committee, comprising
representatives from the Corporation of the City of London and the London
Chamber of Commerce, was formed to administer the activities of the court. In 1975
the Institute of Arbitrators (later to become the Chartered Institute of Arbitrators)
joined the other two administering bodies. In 1981 the name was changed to the
London Court of International Arbitration to reflect the nature of its work, which
40. The ICA returns roughly 15-20 percent of the awards to the arbitrators for revision. See Dezalay
and Garth 1996, 47-48; and Smit 1994, especially 68-72.
41. See Craig, Park, and Paulsson 1990; and The ICC International Court of Arbitration Bulletin,
various issues.
42. The ICC International Court of Arbitration Bulletin, various issues.

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was moving steadily from domestic to international arbitration. In 1986 the LCIA
was incorporated as a limited company under the control of a board of directors. It
is composed of a president, who is also the chairman of the board of directors, four
vice-presidents, and about twenty other members, all of whom are international
arbitrators from major trading countries. The number of members drawn from the
United Kingdom is restricted to no more than one quarter of the total. The court is
assisted by a small London-based secretariat of about five people.
The LCIA is somewhat less involved in arbitration proceedings than the ICA. Its
main function is to select arbitrators or to confirm party-nominated arbitrators. Like
the ICA, the LCIA has the right to reject party-nominated arbitrators if it judges that
they are not independent or that they are otherwise unsuitable. The LCIA fixes the
arbitrators' fees and ensures that the arbitrators comply with the procedural time-
table and respect all other rules of LCIA arbitration. Unlike the ICA, the LCIA does
not require arbitrators to draft terms of reference, nor does it scrutinize arbitral awards.
Despite recent efforts to further internationalize its services, notably through the
creation of four so-called users councils for Europe, North America, Asia-Pacific,
and Africa, the LCIA remains an institution with a British bent.43 This is reflected,
for example, in the fact that all LCIA presidents until 1993 were British, and that 60
percent of court-selected arbitrators and 65 percent of party-nominated arbitrators
are nationals from the United Kingdom. The parties most frequently involved in
cases being considered by the LCIA come from the United Kingdom, United States,
Australia, Canada, India, and Hong Kong.
The Arbitration Institute of the Stockholm Chamber of Commerce. A

frequently named third major international arbitration institution is the S
tute, established in 1917 as an independent entity within the SCC. The SCC
is composed of a board of three members (and three deputies). The chairm
board has to be a judge with expertise in commercial and industrial matter
two other members, one has to be a practicing lawyer, the other "a pers
enjoys the confidence of the business community."44 The board is assiste
small secretariat.
Similar to the LCIA, the SCC Institute's main role is to act as an authority to
appoint arbitral tribunals. Challenges against arbitrators are handled directly by the
board. The rules of the SCC Institute require that a tribunal deal with a case in an
"impartial, practical, and speedy fashion," give all parties "sufficient opportunity to
present [their cases]," and reach a decision "no later than one year after the case has
been referred to the arbitral tribunal."45
43. "Users' councils" have been set up to keep the international business community apprised of the
arbitration services offered by the LCIA and to identify the changing needs of business to be able to
respond quickly to these needs. Membership in these councils is by invitation; members include lawyers,
arbitrators, and multinational industrial, commercial, and trading organizations.
44. SCC 1988, para. 2.
45. Ibid., para. 16, 26.

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The development of the SCC Institute into a major center of international

commercial arbitration dates from the 1970s when the United States and the Soviet
Union agreed that trade contracts between the two countries should contain a clause
providing for arbitration according to the rules of the SCC Institute. The caseload of
the institute grew to a yearly average of about thirty-five in the 1980s and one
hundred in the 1990s. In 1997, eighty-two international cases and twenty-nine
domestic cases were registered with the secretariat. The most frequently represented
nationalities in recent years have been Russian, Ukrainian, and American.
Explaining Forum Selection and Institutional Variety
In this section I seek to explain why actors engaged in international trade and
investment select different methods of international commercial dispute resolution.
I argue that these methods respond to the varying institutional needs of different
types of disputes and disputants. Such needs can be explained in terms of the
uncertainty about the preferences or behavior of contractual partners, the severity of
the enforcement problem, and the uncertainty about the state of the world. The
empirical evidence discussed offers strong support for several Rational Design
conjectures.
Uncertainty, Enforcement, and Centralization
Uncertainty about preferences and behavior varies with the relative intimacy of the
relationship between parties involved in international exchange. Intimacy or close-
ness of a relationship, in turn, depends on the parties' homogeneity, their frequency
of interaction, and their distance from each other. Robert Cooter and Janet Landa,
for example, have documented how traders belonging to ethnically homogeneous
commercial groups, such as the East Indians in East Africa, the Syrians in West
Africa, and the Chinese in Southeast Asia, experience considerably lower levels of
behavioral uncertainty when dealing with one another than when dealing with
outsiders.46 One reason is that such trading groups serve as repositories of trust,
which reduces the probability of a breach of contract between insiders.
Disputes may occasionally erupt even among insiders, but they are likely to be
resolved more cooperatively than conflicts among strangers.47 Marc Galanter, a
leading exponent of the law and society movement, has argued that "in order to
understand the distribution of [domestic] litigation, we must go beyond the char-
acteristics of individual parties to consider the relations between them. Are the
parties strangers or intimates? Is their relationship episodic or enduring? Is it
46. See, for example, Cooter and Landa 1984; and Landa 1981. See also Greif 1992; and Curtin 1984.
47. For examples, see Auerbach 1983. See also Ellickson 1991.

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single-stranded or multiplex?"48 He finds that, generally, the more inclusive and

enduring a relationship between a set of parties, the less likely disputes will be taken
to official forums (public courts); instead, such parties will seek to resolve their
differences in so-called embedded forums, that is, forums that are part of the social
setting within which a dispute arose.49 A classic illustration of embedded commer-
cial interactions and dispute resolution is Stuart Macaulay's study of local business
practices among firms in Wisconsin. Macaulay finds that uncertainty about contract
performance is reduced by widely accepted local norms (for example, "commit-
ments are to be honored in almost all situations-one does not welsh on a deal," and
"one ought to produce a good product and stand behind it") and by close personal
relationships across the boundaries of local business organizations. He notes that
"salesmen often know purchasing agents well. The same two individuals occupying
these roles may have dealt with each other ... [for up to] 25 years. Each has
something to give the other.... [T]op executives may [also] know each other. They
may sit together on government or trade committees. They may know each other
socially and even belong to the same country club."50 Disputes in this business
community are frequently settled without reference to the contract or potential or
actual legal sanctions. "If something comes up, you get the other man on the
telephone and deal with the problem.... One doesn't run to lawyers if [one] wants
to stay in business."51
These examples shed light on the varying degrees of centralization of forums for
resolving international commercial disputes, suggesting the following conjecture:
Centralization of forums to which private international parties resort to resolve their
disputes increases with the uncertainty about the parties' preferences or behavior.
This conjecture is in line with Rational Design conjecture Cl, CENTRALIZATION
increases with UNCERTAINTY ABOUT BEHAVIOR.52 Centralization implies a high degree
of central provision of procedural safeguards and information. Such provision is
characteristic of institutional arbitration; it is absent, however, in ad hoc arbitration
or ADR (see Table 1).
Parties involved in an ongoing mutually beneficial relationship (possibly with
dealings along many different fronts) are less likely to rely on highly institutional-
ized forms of dispute resolution than parties with no anticipated future relationship,
that is, parties that are not repeat players or do not belong to some close-knit trading
48. Galanter 1993, 24.

49. See also Galanter 1981. For examples of embedded forums, see Doo 1973; Columbia Journal of
Law and Social Problems 1970; Bernstein 1992; and Maitland 1936.
50. Macaulay 1963, 63.
51. Ibid., 61.
52. Note that I am interested in knowing not which dispute-resolution clause the parties write into a
contract but which method they ultimately use. The contractual provision may differ from the actual
method used. For example, parties that write an ICC arbitration clause into their contract may decide to
use ad hoc arbitration when a dispute erupts. Similarly, parties may choose some form of arbitration
rather than complying with a jurisdiction clause. Some contracts have no provision for resolving disputes;
in these cases the parties will choose the appropriate forms when disputes erupt, provided the parties have
an interest in settling their disputes. Coe 1997, 56, 161.

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community. There are two reasons. First, parties in a continuing relationship can
more easily control each other because the expected future gains can serve as
hostage.53 They are locked in a "win-win" situation; thus each other's behavior is
quite predictable, for the parties have little to gain (but potentially much to lose)
from using dilatory tactics or adopting other forms of noncooperation. They are
anxious to maintain good relations and are therefore likely to be interested in
reaching a quick and amicable settlement. Second, parties in a continuing relation-
ship typically have good information about each other's past behavior, past prob-
lems, and past solutions. This knowledge may be usefully brought to bear in a new
instance of conflict.
International arbitrators and lawyers whom I have interviewed have confirmed the
importance of the nature of a business relationship in determining how a dispute is
likely to be resolved. Typically, parties in long-term relationships have a strong
preference for settling disputes through ADR or ad hoc arbitration. This finding is
also supported in several writings. Bertie Vigrass, former registrar of the LCIA,
summarizes the evidence as follows: "In the traditional fields of arbitration, such as
maritime, construction, insurance, and commodity, it is usual for the majority of
arbitrations to be 'ad hoc' in nature. This is probably because there is an on-going
relationship between parties, their legal representatives, and arbitrators."54 Four
leading international arbitrators-Martin Hunter, Jan Paulsson, Nigel Rawding, and
Alan Redfern-have similarly noted that "ADR provides an effective means of
resolving disputes between parties who have an interest in maintaining an on-going
business relationship. The parties approach the process in a spirit of negotiation and
compromise, instead of adopting the adversarial positions associated with litiga-
tion."55
The extent of centralization of a dispute-resolution method, however, is not solely
determined by the relative uncertainty about the parties' preferences or behavior.
Enforcement problems may persist even in the presence of good information and
knowledge about the parties if the payoff from unilateral defection is significantly
greater than the payoff from mutual cooperation at the dispute-resolution stage. This
implies that the more severe the enforcement problem, the greater the need for
centralization (Rational Design conjecture C4, CENTRALIZATION increases with EN-
FORCEMENT problems).
Such enforcement problems are typical, for example, when contracts are about to
expire. No long-term relationship will last forever. Construction, licensing, distrib-
utorship, joint venture, and other long-term contracts will eventually terminate, and
relationships will come to an end. Logically, such changes will also affect the ways
in which disputes that arise after a business relationship has ended will be resolved.
Consider, for example, the case of a complex, long-term construction contract as
53. On the role of hostages in economic exchange, see Williamson 1983; and Kronman 1985.
54. Vigrass 1993, 469. See also Graving 1989, 368.
55. Hunter et al. 1993, 73. See also Perlman and Nelson 1983, 232; Coe 1997, 44-49; and Park
1997b.

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described by James Myers, head of a major international construction group:56 At

the onset, the contractor, employer, and engineer are all anxious to maintain
harmonious working relationships with one another. They realize that the ability of
one party to perform over an extended period of time rests on the cooperation of the
others. Disputes, when they arise, will be resolved swiftly, fairly, and in a friendly
fashion. ADR and ad hoc arbitration are the preferred methods of resolving disputes
in such settings. Parties may sometimes even refrain from presenting claims, lest the
relationship be strained. Once the project is completed, however, the parties'
attitudes are likely to change. A contractor who has no further business with the
employer may now feel no compunction about demanding payment for additional
costs accumulated during the course of the construction, and the employer will have
no hesitation in dismissing such claims as baseless. Myers notes that "proceedings
which occur after the completion of an [international construction] contract ... are
resolved in a distinctly adversarial atmosphere in which large sums of money are
sought, with little or no 'commercial downside'-meaning that the commercial
relationship has normally expired and the parties have nothing to lose by refusing to
accommodate each other for the sake of continuous harmonious commercial
relations."57
It is apparent from this example that good will, the prerequisite for successful use
of ADR or ad hoc arbitration, can no longer be taken for granted after a contractual
relationship has ended. In such a situation, ADR and ad hoc arbitration are doomed
to failure, but institutional arbitration is in its element. Unsurprisingly, the vast
majority of disputes submitted to institutional arbitration arise shortly before or after
a commercial relationship has ended. The following example, a typical institutional
arbitration case, explains why and illustrates how procedural safeguards and
monitoring provided by arbitral institutions help to overcome the difficulties posed
by defection strategies.5
In 1987 a large German company (the claimant) entered into an agreement with
a firm in Colombia (the defendant) granting the Columbian firm the exclusive
license to manufacture and distribute certain pharmaceutical and biological products
in Colombia for four years. In 1991 the German company decided not to renew the
license agreement, and one year later it initiated arbitration proceedings claiming
that the defendant had breached certain of its surviving obligations, such as
reporting inventory and sales of the licensed products and refusing to pay substantial
sums. The Colombian firm refused to respond to these claims.
In this case the conflict erupted after one party decided to end a business
relationship. For the Colombian firm, the termination of the contract seems to
56. Myers 1991. See also Schwartz 1995; Stipanowich 1996; and Vagts 1987.
57. Myers 1991, 316.
58. The example is based on an actual ICC arbitration case. The names of the parties have been
omitted. The case captures many of the features typical of institutional arbitration, notably in licensing,
distributorship, construction, and sale of goods. About 70 percent of ICC arbitration cases fall into these
categories.

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have triggered a change in its view about the necessity of acting cooperatively.
Defection from "surviving obligations" may be seen as an attractive strategy
because it brings immediate gains without imposing an obvious long-term cost.
Such an uncooperative disposition typically also pervades the dispute-resolution
process in this type of case. For example, the defendant could try to evade the
contractual obligation to arbitrate the dispute, arguing that the matter falls under
its national jurisdiction and can only be decided in a national court according to
national law and procedural rules. This is precisely the strategy that the
Colombian party took; it wanted the case to be tried in Colombian courts under
Colombian law. If this fails, the defendant may seek to derail the arbitral
proceedings by disagreeing on the choice of arbitrator(s), procedural rules, place
and language of arbitration, and applicable law. It could also try to delay the
proceedings by failing to appear on dates selected for hearings or by raising
questions over procedural matters. If none of these dilatory tactics succeeds, the
defendant still has the option of challenging the arbitral award before a national
court, on the basis that the arbitral tribunal exceeded its jurisdiction or that there
was a substantial miscarriage of justice in the course of the proceedings. Finally,
the party may simply choose not to honor the arbitral award.
Ad hoc arbitration demands little more than simple coordination among the
arbitrators, procedural rules, applicable law, and place of arbitration. The institu-
tional demands on cases like the German-Colombian one are much more complex.
Extensive monitoring and strong institutional safeguards are necessary to deprive
potential bad faith and other forms of "defection" of their effects in such cases.
The ICA is an example of an organization well equipped to handle such
"difficult" cases. Its rules and institutional apparatus effectively override obstacles
that a noncooperative disposition by one of the parties may pose. For instance, if one
of the parties refuses to participate in the arbitral proceedings, the ICA is entitled to
appoint the arbitrator(s) and constitute a tribunal. The notice and summons proce-
dure is performed by the ICC secretariat and is supervised by the court, assuring the
arbitrators that the defaulting party had notice of the arbitration.59 If one party fails
to sign the Terms of Reference, the ICA may approve them and the proceedings
continue. After the Terms of Reference are approved, the opportunity for a party to
engage in dilatory tactics by presenting additional claims and counterclaims is
minimized because such claims can only be heard on the agreement of all parties.60
The court closely monitors the arbitral proceedings, ensuring that time limits and
due process principles are respected.61 It replaces arbitrators who do not fulfill their
functions or are behind in their work. At the end of the process, it scrutinizes the
award in relation to jurisdiction and applicable law. This monitoring and checking
59. Aksen 1991, 12.

60. Ibid., 13.
61. Principles of due process include transparency of the arbitral process, the right of the parties to be
called and heard, and equal treatment of the parties in the exchange of pleadings, in evidentiary matters,
in resort to expertise proceedings, and in the holding of hearings.

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increases the quality of the arbitral award and, in turn, reduces the chance that the
losing party will challenge the award in a national court. As noted by an experienced
international arbitrator, "most final awards rendered under ICC auspices are carried
out voluntarily by the parties, because [of their high] quality.... A company that
fails to carry out an [ICC award] is almost certain to lose subsequent[ly]62 and in
addition runs the risk of jeopardizing its reputation in international circles."63
Indeed, only about 6 percent of all ICC awards have been challenged by the losing
party, and a minute 0.5 percent of awards rendered under the aegis of the ICC have
been set aside by a national court.64
It is easy to see why ad hoc arbitration and ADR are ill-suited for situations
represented by the German-Colombian case. If at any stage of the proceedings in ad
hoc arbitration or ADR matters go unexpectedly awry and one of the parties starts
acting in bad faith, there is no international supervisory institution to coerce
compliance with procedural rules.65 Furthermore, if the losing party in an ad hoc
arbitration case challenges the award in a national court, the winning party will find
it considerably more difficult to prove to the national court that due process rules
were respected and the tribunal was impartial and objective. Not surprisingly,
national courts are much more comfortable confirming commercial awards that
result from a monitored arbitration process than those produced by ad hoc proceed-
ings.66
Uncertainty about the state of the world and centralization. Uncertainty about
the state of the world is a third variable that is useful in understanding the selection
of different arbitration options. It refers to the extent to which actors involved in
international exchange are knowledgeable about international commercial arbitra-
tion and possess information about the legal environment (the laws and the integrity
of local judges) in which arbitration takes place and the conditions for enforceability
of arbitral awards. Good information on the legal environment and enforceability is
a prerequisite of successful resolution of commercial disputes. The conjecture here
is straightforward: The greater the uncertainty about the present state of the world,
the greater the need for centralized information on international commercial arbi-
tration and domestic arbitration laws and practices (Rational Design conjecture C2,
CENTRALIZATION increases with UNCERTANTY ABOUT THE STATE OF THE WORLD). Such
information may be particularly important in cases involving traders with little
62. In other words, when the winning party applies to a national court for recognition and enforcement
of the award.
63. Aksen 1991, 22. See also David 1985, 45; and Hunter et al. 1993, 10.
64. See Craig, Park, and Paulsson 1990, 32-33; and David 1985, 50.
65. The type of problem that can arise in ad hoc arbitration is illustrated in a recent case (Intercarbon
Bermuda v. Caltex Trading and Transport), where one party refused to proceed with an arbitration
pursuant to an arbitration clause that provided for no institution to set the arbitration in motion. The
claimant was forced to spend seven years in litigation before obtaining a federal court order compelling
arbitration. Park 1995, 70. See also Coulson 1993; Aksen 1991, 8-9; and Paulsson 1993, 438.
66. David 1985, 11.

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experience in international exchange or traders from very different cultural and

linguistic regions. Major arbitral institutions help to provide the necessary informa-
tion and procedural guidelines to enable inexperienced parties to resolve their
commercial disputes in an efficient and timely fashion.
"Legal environment" encompasses domestic legislation on arbitration and court
interpretations of it. The law in the location where arbitration will occur is of great
importance because it may determine questions of the capacity of the parties to
agree to arbitration, the validity of the arbitration agreement, the "arbitrability" of
the subject matter of the dispute, and the recognition and enforcement of arbitral
awards. Thus parties seeking to maximize procedural certainty may benefit from
relying on centralized information on domestic arbitration laws and practices; such
information will help them choose an arbitral situs where annulment of awards is not
likely to be facilitated by a bribe to a local judge, where the range of nonarbitral
legal questions is narrow and well defined, where the integrity of the arbitration
process is ensured and any judicial meddling with an arbitrator's substantive
decision is minimized, and where arbitration decisions are enforceable-if neces-
sary, through execution against the assets of the losing party by proceedings in
national courts of any state in which these assets are located.
Some countries have clear arbitration legislation, but their courts may misapply
the law, for example, by adopting overelastic interpretations of "violations of public
policy" as grounds for setting aside awards. Other countries may have national laws
containing mandatory provisions that override explicit contractual stipulations. Two
examples serve to illustrate how arbitrary and fickle domestic legal decisions
regarding international arbitration may be, thus underlining the importance of
centralized information on developments in national arbitration laws and prac-
tices:67
The Indian Supreme Court held in May 1992 that if Indian law applied to an
arbitration clause, an application to set aside an award could be heard in India, even
if the place of arbitration were outside India, and the Indian courts could enjoin the
enforcement of the award anywhere. In other words, an acceptance of Indian law in
a contract with an Indian party would ultimately lead to the Indian courts irrespec-
tive of the choice of a neutral venue.
In Singapore, in a 1988 decision, the High Court affirmed restrictions on foreign

arbitration parties imposed by local practice rules. This was followed by a new
Singapore Legal Profession Act, which stipulates that foreign lawyers can only
appear in arbitration proceedings when the law applicable to a dispute is not
Singaporean law. When Singaporean law does apply, foreign lawyers may only
appear jointly with lawyers who are Singaporean nationals.
The second issue of central importance is the enforceability of arbitral awards. An
award rendered in a given country may not automatically be enforceable in other
countries where the losing party's assets may lie. Thus, a key function of major
67. The examples are drawn from Hunter et al. 1993. See also Park 1997a.

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arbitral institutions is to collect and continuously update information on the

conditions of enforceability of awards in various parts of the world. For example, by
1997 over one hundred states had acceded to the 1958 New York Convention on the
Recognition and Enforcement of Arbitral Awards.68 The majority of these states
adopted the so-called reciprocity reservation. That means that their courts will
enforce an award under the New York Convention only if the award has been
rendered within the territory of another state that has also adhered to the New York
Convention.69 A court in a signatory country may refuse recognition and enforce-
ment of awards only on procedural grounds, including invalidity of the arbitral
agreement, denial of an opportunity to be heard, arbitrator excess of jurisdiction,
arbitral procedure contrary to the parties' agreement, and annulment of the award in
the country where rendered.70 However, the interpretation by national courts of
these grounds for denying enforcement of arbitral awards may vary from country to
country. Therefore, major arbitral institutions also keep information on the various
national interpretations.
In sum, private firms and their lawyers may often lack sufficient information
about the legal state of the world to avoid expensive delays and other negative
surprises. This is particularly true if the parties are inexperienced in international
trade and investment or if they deal with firms from distant regions.71 Uncertainty
about the legal environment and enforceability can be reduced, at least in part, by
relying on information provided by major arbitral institutions, such as the ICA or the
LCIA. Such forums have the institutional capacity to monitor and record changes in
domestic arbitration laws and practices around the world, especially if their
memberships have a broad geographic base.
An examination of the docket of the ICA offers supporting evidence for the
conjecture that firms from different regions rely more heavily on centralized support
and expertise for the resolution of their disputes than firms operating in relatively
homogenous regions. Table 2 lists the origin of the parties in all ICA cases since
1974. Strikingly, Western Europeans have been involved in well over half of all
cases. The key finding, however, emerges from Table 3. Despite the well-known
fact that Europeans (and North Americans) trade much more intraregionally than
with other regions, it appears that considerably more interregional commercial
68. See UN Doc E/Conf. 26/SR., 1-25. The standard work on this treaty is Berg 1981. Besides the
New York Convention, there are at least two other international enforcement conventions, the 1975
Inter-American Arbitration Convention (also called the Panama Convention) and the 1961 European
Convention on International Commercial Arbitration. In addition to these conventions, many bilateral
commercial and investment treaties contain enforcement provisions. For a brief historical account of the
development of the various enforcement conventions, see Redfer and Hunter 1991, 60-64; see also
Sanders 1996, 41-42; and Jackson 1991.
69. Hunter et al. 1993, 19. Art. III of the New York Convention provides that convention states shall
recognize foreign awards as "binding and enforce them in accordance with the rules of procedure of the
territory where the award is relied upon," subject to no conditions more onerous than those imposed on
domestic awards.
70. Park 1995, 55-56.
71. Aksen 1991, 14.

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TABLE 2. Origin of parties in ICC arbitration cases (average per period)
Region 1974-85 1986-90 1991-95 1996-97
Western Europe 59.2% 56.9% 59.7% 49.5%

Central and Eastern Europe 3.8% 3.2% 6.1% 7.1%
Middle East 8% 5.2% 4.1% 3.2%
Africa 9.2% 8.9% 5.3% 5.7%
North America (United States and Canada) 13.3% 13.8% 11.8% 13.5%
Latin America and the Caribbean 3.4% 3.6% 4.8% 11.5%
Asia 3.1% 8.4% 8.2% 9.5%
Source: ICC International

during internship at ICC In
disputes are submitte

region, that is, Europ
average, approximatel
from different regio
geographic distribut
interviewed in Paris,
common among part
However, since no i
information theref
considered tentative.
Uncertainty about the state of the world and flexibility. Uncertainty about the
state of the world can also refer to the susceptibility of an issue-area to new
developments or unanticipated shocks that may leave parties in uncharted legal
territory. The conjecture, in this case, is as follows: The more uncertain the state of
the world, the greater the desirability of a flexible method for resolving disputes
(Rational Design conjecture Fl, FLEXIBILITY increases with UNCERTAINTY ABOUT THE
STATE OF THE WORLD), thus implying a preference of arbitration and ADR over
litigation in public courts.73
The flexibility offered in arbitration and ADR may be valued, for example,
because it gives firms operating at the forefront of new production and exchange
methods the possibility of appointing experts who have the necessary technical
knowledge to evaluate complex, new situations and understand the facts; an
ordinary judge cannot be expected to have this specialized knowledge. Complex
72. Based on interviews at the ICA (April 1998), the SCC Institute (April 1998), and law firms in New
York (October 1998).
73. On institutional flexibility and its relationship to uncertainty, see also the studies in this volume
by Oatley, Richards, and Rosendorff and Milner.

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TABLE 3. Regional distribution of ICC arbitration cases (average per period

based on available samples)
1974-85 1986-90 1991-95 1996-97

(37 cases) (36 cases) (19 cases) (140 cases)
Intraregional disputes 30% 11% 26% 32%

Interregional disputes 70% 89% 74% 68%
Source: Author's computation based on case collections i

ains, and Araldez 1994; Araldez, Derains, and Hascher 19
ternship at ICC International Court of Arbitration, Paris, 1
technical issues may arise in cases dealing with

property, trademarks, technical know-how, an
Justice of the Court of Appeals of England an
from time to time which involve questions wh
current scientific knowledge. Can they be tried
There must be doubt."74
Flexibility also permits the expert to disregard
of the law in favor of a solution that accords wi
tribunal, for example, may be given powers of
it is sometimes put, the right to decide ex
conscience); that is, the tribunal may reach a de
principles, provided the decision is fair. More ge
to tailor the rules-regarding procedure, evid
case-to their specific needs.75
The advantages of flexibility in dispute resolut
of a major arbitration case that involved IBM an
computer companies. The dispute erupted ov
operating system software. In the early 1970s F
IBM-compatible operating system software for
later, IBM confronted Fujitsu with allegatio
programs violated IBM's intellectual property ri
two companies signed two agreements in 19
immunity and waiver of IBM claims with respe
Fujitsu's programs in exchange for paymen
agreement required each party to provide the
74. Neill 1988, 235. For confirming evidence of the import

in Biihring-Uhle 1996, 136-37.
75. Redfern and Hunter 1991, 24; see also Jones 1958, 4
76. This account draws on Mnookin 1994.

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compatibility. These agreements, however, quickly broke down, and in 1985 IBM
filed a demand for arbitration accusing Fujitsu of copying its software in violation
of copyright law and IBM's rights under the 1983 agreements. Fujitsu denied
violating IBM's rights and accused IBM of failing to live up to its obligations under
the agreements.
The case turned out to be highly complex because of enormous legal and factual
uncertainties. IBM and Fujitsu were developing software in a world of rapidly
changing technology. However, no clear understanding existed of what the law of
copyright was and how it applied to computer software and the particular subject
matter of the dispute. One of the arbitrators involved in the case, Robert Mnookin,
noted that "this was not a dispute where there was a clear and agreed understanding
of the underlying law and where it was only necessary to apply clear law to
particular facts.... There were no [prior] ... judicial decisions. No one knew the
precise scope of copyright protection."77 Legal uncertainties were compounded by
factual uncertainties. Indeed, the disputed programs involved hundreds of thousands
(in some cases millions) of lines of codes, rendering fact finding exceedingly
difficult.
The arbitrators overcame some of these difficulties by themselves creating the law
that would bind the two parties vis-a-vis each other. First, they probed the interests
of the parties to identify areas of convergence.78 They then proceeded to develop,
in close consultation with the parties' technical representatives, detailed rules to
define what would and would not be permitted in compatible software development.
As a result of the arbitration effort, IBM and Fujitsu agreed to set aside the 1983
agreements and execute a new agreement in 1987 that provided a successful
framework for resolving all issues in dispute.
In short, arbitration enabled the parties to take a flexible approach and tailor the
rules to their particular problem and underlying interests. Rather than framing the
strategies in terms of penalties or exoneration for past conduct, the parties took a
forward-looking strategy and actively participated in the rule-making process that
eventually established clear rights and obligations between them.
Far from being an isolated case, the IBM-Fujitsu dispute is representative of a
rapidly growing body of international arbitration cases dealing with intellectual
property rights. This growth has been fueled by the speedy reduction of trade
barriers, the proliferation of digital means of communication, and the increase of
commerce via the internet. Unsurprisingly, such disputes are the fastest growing
77. Robert Mnookin at Geneva Global Arbitration Forum (21 October 1993); see Mnookin, Mean, and
Robine 1994, 141-42.
78. It became clear that Fujitsu's paramount interest was to develop IBM-compatible software, but it
demanded access only to external interface information, not information about internal design of IBM
programs. IBM in turn was interested in ensuring that Fujitsu did not copy internal design information
and that it received adequate compensation for external interface information contained in IBM programs
extracted by Fujitsu.

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category of cases submitted to the ICA, increasing from 8.6 percent in 1982 to an
average of almost 20 percent in the past four years.7
The institutional characteristics, such as flexibility, that render arbitration
appealing in a growing number of areas, may not, however, be necessary or even
desirable in other commercial contexts, and thus the requisite dispute-resolution
methods will vary. Consider, for example, the case of international loan
agreements between private parties. Big companies may take out large syndi-
cated loans to finance trade, exploit natural resources, assist take-over bids,
provide working capital, construct new plants, drill rigs, buy ships, and so on.
When writing international loan agreements, the lending banks will take great
care in covering all contingencies that may result in losses to the banks and in
seeking the best possible protection against such events. The banks will also
spell out as clearly as possible what sums of money are to be paid at any
particular time, how they are to be paid, and by whom.80
Loan agreements also contain a governing-law or choice-of-law clause that sets
forth the law that determines the validity of the contractual provisions that have been
inserted in the loan agreement and the effect and scope of the contractual rights and
obligations expressed in the agreement.81 As Richard Slater explains, "A bank wants
to be sure that if certain events of default, which it has taken the trouble to write into
its loan agreement, occur, then it is entitled to accelerate the loan82 without having
to worry about whether the event is material, whether the borrower was to blame for
its occurrence, whether it was fair, or whether it was in accordance with normal
practice. A bank wants as little scope as possible for debate about the meaning of
the provisions in its loan agreement."83
It is now easy to see why bankers shun arbitration clauses and, instead, insert
in almost all international loan agreements jurisdiction clauses, selecting either
New York courts or the London High Court as forums (depending on whether
the contract is governed by New York or British substantive law).84 Unlike in
construction, engineering, and intellectual property cases, which tend to go to
arbitration, the question in international loan cases is generally quite simple: has
the debt fallen due and been left unpaid, and, if so, how much is it? In most
cases, establishing this fact is simple. Thus disputes under a loan agreement will
79. Based on interviews at the ICA, Paris (April 1998). One area that several interviewees identified
as likely to generate heavy arbitration activity is telecommunications, the fastest growing sector of most
industrialized economies. Privatization of government-owned network operators, deregulation, and the
introduction of cross-border competition are fundamentally changing the industry; and many telecom-
munication disputes are expected to involve intellectual property issues. Interviews at the Commission
of the European Union, Brussels (March 1998), and the LCIA, London (April 1998).
80. Slater 1982, 177-78.
81. Gruson 1982, 17. The vast majority of loan agreements select British or New York law, in part
because of these laws' strict approach to the concepts of breach of contract and sanctity of contract.
82. "To accelerate the loan" means to terminate a lending relationship and declare all amounts
outstanding under the loan agreement immediately due and payable.
83. Slater 1982, 195-96.
84. Cates and Isem-Feliu 1983, 28-29, 34.

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typically relate not to matters of fact but law.85 However, legal uncertainties or
intricacies are also rare in loan cases. Legal matters under loan agreements are
well covered by case precedents and statutes; thus the courts in New York and
the United Kingdom possess, in most cases, the requisite information to deal
expeditiously with default cases.86 For these reasons, litigation seems a more
appropriate method than arbitration for the resolution of disputes arising from
international loan agreements.
Conclusion
International commercial arbitration has emerged over the past two decades as the
method of choice for settling a growing number of trade and investment disputes
involving private parties. Its surge in popularity can be attributed in part to the
institutional attributes of arbitration, which include flexibility, technical expertise
privacy, and confidentiality. These attributes match the needs of disputants in area
such as intellectual property, transfer of technology, engineering, and construction
Arbitration options, however, are not the only methods available to private parties
The market for dispute-resolution mechanisms also includes recourse to publ
courts and several alternative-dispute resolution techniques.
I have argued that firms on the demand side select methods for dispute resolutio
according to their design problems. In other words, the various methods respond t
the varying institutional needs of different types of disputes and disputants, an
these needs can be explained in terms of the severity of the enforcement problem
uncertainty about the preferences or behavior of contractual partners, and uncer-
tainty about the state of the world. More specifically, the findings are that (1)
centralization of forums to which private international parties resort to resolve the
disputes increases with the severity of the enforcement problem (Rational Design
conjecture C4, CENTRALIZATION increases with ENFORCEMENT PROBLEMS); (2) central
ization also increases with uncertainty about the parties' preferences or behavior
(conjecture C1, CENTRALIZATION increases with UNCERTAINTY ABOUT BEHAVIOR); (3) th
need for centralized information on international commercial arbitration and do-
mestic arbitration laws and practices grows with greater uncertainty about the legal
environment in which arbitration takes place and the conditions for enforceability of
arbitral awards (conjecture C2, CENTRALIZATION increases with UNCERTAINTY ABOUT
THE STATE OF THE WORLD); and (4) the desirability of a flexible method for resolving
disputes increases with the susceptibility of an issue-area to new developments or
unanticipated shocks that may leave the parties in uncharted legal territory (con-
jecture Fl, FLEXIBILITY increases with UNCERTAINTY ABOUT THE STATE OF THE WORLD).
85. Wood 1980, 71-73; see also Slater 1982, 197; and Cates and Iser-Feliu 1983, 28-36.
86. Ryan 1982, 89-132.

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This study thus illustrates that Koremenos, Lipson, and Snidal's analytical
framework not only sheds light on institutional arrangements among states87 but
can also account for varying forms of international governance established by
private parties.
My analysis, however, has only scratched the surface of a complex but fascinating
area of research for scholars of international relations and other social scientists.
Several issues evoked in passing merit fuller analysis. One is the study of special-
ized arbitration, for example, as conducted in maritime affairs or as offered by
various stock and commodity exchanges. Such arbitration is typically conducted
within commercial groups with strong national roots. For example, the British
Coffee Trade Federation numbers over one hundred firms as members, including the
leading roasters, merchants, brokers, and wharfingers in the United Kingdom.
Notwithstanding its national base, the federation is linked to a wide network of
transnational commodity organizations such as the Committee of European Coffee
Associations, the European Federation of Coffee Roasters Associations, and the
Federation of Commodity Associations. This raises the question of how this
"institutional embeddedness" is likely to shape the arbitral institutions and practices
of national federations.
Another question that emerges from the study of arbitration is why states have
traditionally been reluctant to resort to international arbitration. Indeed, while the
number of arbitration cases involving private parties has grown exponentially,
instances of interstate arbitration are few. For example, after a modest beginning,
recourse to the Permanent Court of Arbitration at the Hague became infrequent in
the extreme. Of the twenty-five cases considered by the court, twenty-two cases
were disposed of by 1935; the other three were heard in 1940, 1956, and 1970,
respectively.88
Another example are disputes submitted to the arbitration mechanism of the
International Center for the Settlement of Investment Disputes (ICSID). ICSID was
created in 1966 by the so-called Washington Convention as part of the World Bank
organization. ICSID's authority is limited to investment disputes where one of the
parties is the host state. By 1995, only thirty investment disputes had been brought
to the ICSID for arbitration, resulting in what Stephen Toope calls a "highly limited
case load";89 and Aron Broches notes similarly that "advance acceptance of
[ICSID's] jurisdiction has not resulted in a large number of cases."90
The specific reasons for the paucity of arbitration cases involving states are varied
and complex. However, one theme runs throughout history, namely the deep
concern of states with maintaining sovereignty and independence combined with a
perception that national autonomy and international arbitration practices are not
easily compatible. Consider the following examples: In 1903 France concluded an
87. Koremenos, Lipson, and Snidal, this volume.

88. Butler 1992, 44.
89. Toope 1990, 255.
90. Broches 1979, 374; see also Gray and Kingsbury 1992.

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agreement with the United Kingdom that provided for the settlement by arbitration
of certain disputes that may arise between the two countries. Reference would be
made to the Permanent Court of Arbitration. Tellingly, however, the signatories
added a clause to the agreement stating that only those differences would qualify for
submission to arbitration "that... do not affect the vital interests, the independence,
or the honor of the two contracting states."91 Similar provisions were inserted in
other arbitration treaties of the period. Needless to say, the malleability and
subjective nature of these exceptions considerably weakened the legal obligation to
arbitrate disputes.92
Some countries considered even such watered-down arbitration clauses as too
intrusive. Latin American countries, for example, rejected arbitration and insisted
so-called Calvo clauses that required foreign parties to agree to adjudication withi
the host state of any dispute arising out of an investment contract.93 More recent
oil-exporting nations have manifested similar hostility to arbitration, demanding t
"disputes arising between a government and operator shall fall exclusively with
the jurisdiction of competent national courts."94
States' concern with safeguarding sovereignty is also reflected in principles o
international law. One example is the distinction made between immunity from
jurisdiction, also called immunity from suit, and immunity from execution, whi
means immunity from measures sought against the property of a state for the
enforcement of an arbitral award. A waiver of immunity from jurisdiction, whi
follows from entering into a valid agreement to arbitrate, does not automatica
entail a waiver of immunity from execution. This principle is enshrined, f
example, in the ICSID Convention, which stipulates that "nothing ... [in the ICS
Convention] shall be construed as derogating from the law in force in an
Contracting State relating to immunity of that State or any foreign State from
execution."95 Similarly, the draft Convention of State Immunity that the Intern
tional Law Commission published in 1991, after thirteen years of work, states th
"no measures of constraint such as attachment, arrest, and execution again
property of a State may be taken in connection with a proceeding before the cou
of another state.... Immunity from execution may be viewed, therefore, as the la
fortress, the last bastion of state immunity."96 Today most states have accepte
doctrines of restricted immunity and waiver of immunity with respect to jurisd
tion; but they continue to apply absolute immunity when it comes to actu
execution.
91. Art. 1 of the agreement is quoted in Carter and Trimble 1991, 332-33.
92. On sovereignty costs in the context of regional and international legalization, see Abbott and
Snidal 2000; Mattli 1999; and Mattli 2000.
93. Shea 1955.
94. 1967 OPEC resolution quoted in Craig, Park, Paulsson 1990, 647.
95. Art. 55 of Washington Convention.
96. Art. 18 of the Draft Convention of State Immunity by the International Law Commissi
Commentary on Article 18 in the Report of the International Law Commission; quoted in Sander
73.

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In practice, the shocking result can be that a party, after having put every effort
into an arbitration against a state and having obtained a judgment for enforcement
in its favor, finds itself unable to collect the money to which it is entitled under the
award.97 One remedy, agreeing to a waiver of immunity from execution when
entering into a contract, is rarely used.98
In sum, traditional aversion of states to compromising over issues of national
control and autonomy, as well as practical problems in enforcement that stem from
the age-old principle that with sovereignty comes immunity, may take us a long way
toward explaining why arbitration cases involving states have been relatively few.
97. Carter and Trimble 1991, 366.

98. Sanders 1996, 81.

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Private Justice in a Global Economy: From Litigation to Arbitration

Author(s): Walter Mattli

Stable URL: https://www.jstor.org/stable/3078620

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The study of private settlement of cross-border trade and investment disputes

International Organization 55, 4, Autumn 2001, pp. 919-947

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Arbitration becomes international when the parties to a dispute reside or conduct

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The study is organized as follows. In the first section I briefly re

Private Dispute Resolution and the Institutional Literature

16. Krasner 1983, 2.

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19. Williamson 1975 and 1985.

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any comprehensive study of contract."22 Beth Yarbrough and Robert Yarbrough

Institutional Features of International Commercial Dispute-

The range of methods for resolving international commercial disputes is wide. It

Flexibility in Dispute Resolution

A key feature of arbitration is its high degree of procedural flexibility. Arbitration

22. Ibid., 168.

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Centralization of Forums for Resolving Disputes

International commercial arbitration can be conducted in two ways, as institutional

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TABLE 1. Institutional dimensions of methods for resolving international

Litigation Institutional arbitration Ad hoc arbitration

Flexibility Low (typically) High High

considered in order.34 Table 1 summarizes the key institution

Illustration of Institutional Arbitration: Three Private Forums

International Chamber of Commerce Arbitration. The ICC is a business

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chants of different national backgrounds.37 It is composed of a chair, eight

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The London Court of International Arbitration. The LCIA, another long-

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The Arbitration Institute of the Stockholm Chamber of Commerce. A

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The development of the SCC Institute into a major center of international

Explaining Forum Selection and Institutional Variety

Uncertainty, Enforcement, and Centralization

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single-stranded or multiplex?"48 He finds that, generally, the more inclusive and

48. Galanter 1993, 24.

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described by James Myers, head of a major international construction group:56 At

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59. Aksen 1991, 12.

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experience in international exchange or traders from very different cultural and

In Singapore, in a 1988 decision, the High Court affirmed restrictions on foreign

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arbitral institutions is to collect and continuously update information on the

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