International Arbitration: What it is and How it Works

International arbitration is used to resolve three main types of cross-border disputes. We offer an overview of each type of dispute-resolution process and how it functions in the real world

By — on / International Negotiation

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Disputes—whether between individuals, companies, or governments—become all the more complicated when they cross national borders. It’s no surprise, then, that a variety of forms of international arbitration, in addition to other dispute-resolution processes, including mediation, are now available to resolve them. 

Arbitration is a process in which parties to a dispute agree to have a neutral person or panel reach a binding decision that settles their dispute based on previously agreed-upon norms and rules. In international arbitration, a dispute is referred to an impartial tribunal or panel for a binding decision, often on the basis of international law, according to Jeswald W. Salacuse, dean and distinguished professor emeritus at Tufts University’s Fletcher School of Law and Diplomacy. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, also known as the New York Convention, governs arbitration agreements and awards for 169 nations. The Convention requires national courts to recognize and enforce foreign arbitral awards and arbitration agreements

There are three main types of international arbitration, writes Salacuse in the Negotiation Journal. The three types have principles and processes in common, and often the same people serve as arbitrators or legal counsel in all three types. But the details of the types of international arbitration vary based on the nature of the participants and the rules they have agreed to apply to their dispute. We consider each type of international arbitration in turn.

  1. Interstate Arbitration

In interstate arbitration, nations, represented by their governments, resolve their disputes through arbitration. Though interstate arbitration is essentially a legal process, viewing it only in legal terms “overlooks its tactical and strategic importance in enabling contending states under appropriate conditions to settle significant international conflicts,” writes Salacuse in the Negotiation Journal. To take one example, the Red Sea Islands Arbitration between Eritrea and Yemen was aimed at settling competing claims to some uninhabited rocks in the Red Sea. But the international arbitration had the broader advantage of providing “a face-saving way to end a dangerous military confrontation in 1995 that threatened an important global trade route,” according to Salacuse. 

Despite its potential power as a means of resolving international conflict, interstate arbitration is little used and “remains a largely forgotten item at the bottom of the dispute settlement toolbox, overlooked in books, articles, and courses in conflict resolution,” Salacuse writes. He argues that international peacemakers and the programs that train them should pay more attention to the ability of interstate arbitration to “give diplomacy a helping hand.” 

  1. Investor-State Arbitration

Investor-state arbitration is “a revolutionary innovation in international litigation,” writes Salacuse in the International Lawyer. This fast-growing category of international arbitration adjudicates disputes between nations and private foreign investors, such as foreign nationals or companies.

Investor-state arbitration came about in the second half of the 20th century through nations’ negotiations of bilateral and multilateral investment treaties. In these treaties, nations make commitments regarding how they will treat investors and investments from other states and agree to enforcement mechanisms, particularly arbitration of disputes with foreign investors. 

Investor-state arbitration gives foreign investors the right to “sue a host government for compensation before an international arbitration tribunal when they have been aggrieved by that government’s actions,” according to Salacuse. As such, it marks a “radical departure” from earlier methods of settling such disputes, which required investors to rely on “diplomatic protection” by their home countries. By 2021, investors had sued 124 governments in over 1,100 cases brought to investor-state arbitration. Many, though not most, of these international arbitration cases resulted in an arbitration awards totaling hundreds of millions of dollars, writes Salacuse. 

  1. International Commercial Arbitration

International commercial arbitration, the most common form of international arbitration, occurs between parties based in different countries. Most commercial arbitration cases involve contractual disputes between corporations. 

Businesses from different countries generally prefer to arbitrate their disputes rather than adjudicate them in the courts of one side or another. This is because they believe an international tribunal is likely to be more independent of national prejudices and more knowledgeable about international business practices than an ordinary national court of law would be.

As a result, most contracts between corporations from different countries contain a dispute resolution clause specifying that any disputes arising under the contract will be handled through arbitration rather than litigation, writes Charles Bjork in an article for the Georgetown University Law Library. The parties can and should specify the forum for the arbitration, procedural rules, and governing law when negotiating their initial contract. The types of law applied in arbitration include both procedural and substantive international treaties and national laws, as well as the procedural rules of the relevant arbitral institution.

What have your experiences been like with international arbitration, if any? What else would you like to know about international arbitration? 

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One Response to “International Arbitration: What it is and How it Works”

  • Edgard M.

    Given my personal experience ( over 30 arbitrations / several mediations and Dispute boards ) I can say that arbitration and or other means for resolving disputes in international transactions , away from state courts ,remain a viable route and should be more and more encouraged especially by dedicating more academic credentials to said topic. I do not know what is the situation nowadays at the universities but it is worth it to consider .


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