International Arbitration Landscape in the U.S.

After discussing the U.S. – Türkiye market and how to expand in the U.S. in our first blog post, we now proceed to analyze the international arbitration landscape in the U.S.

The initial choice for a dispute resolution method is between arbitration and litigation. The consequences of choosing effectively are important. The decision will impact the time and money spent on the resolution of the dispute, the procedural rules governing such dispute, and the enforcement procedures and possibilities of a future decision. Procedural flexibility, efficiency, privacy and confidentiality, and expertise of the decision-makers in the subject matter of the dispute are some of the oft-repeated advantages that arbitration offers over litigation. A particularly important advantage of arbitration, primarily within the context of cross-border transactions, is the perceived neutrality of arbitral proceedings vis-à-vis domestic courts—particularly from the foreign party’s perspective. The fact that all parties involved in the dispute have the opportunity to tailor the procedure provides them with a trustworthy framework with which both parties can feel comfortable. In this regard, the U.S. has a desirable arbitration landscape for cross-border transactions and is considered a pro-arbitration forum.

Given our focus on the U.S. – Türkiye market, it is important to start by mentioning three specific international treaties in place between these two countries. Two of the treaties relate to the importance of foreign direct investment between the two countries: the 1985 Treaty between the U.S. and Türkiye concerning the Reciprocal Encouragement and Protection of Investments (commonly known as the U.S.-Türkiye Bilateral Investment Treaty) [1] and the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID—International Center for the Settlement of Investment Disputes—Convention).[2] The third treaty is aimed at commercial relations and provides for the recognition and enforcement of both commercial arbitration agreements entered into and arbitral awards issued in either country. This is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).[3] This set of treaties is of the utmost importance for businesspeople in either jurisdiction as it provides them with certain guarantees regarding their investments and commercial relations with the other country and their businesspeople.

In terms of legislation governing arbitration, the U.S. has both federal and state laws. The Federal Arbitration Act (the “FAA”) is the primary legislation governing arbitrations, including those related to the maritime transaction, contracts involving interstate and foreign commerce.[4] The FAA states that a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”[5] The FAA also provides very limited grounds to vacate an arbitration award, namely: (i) corruption, fraud, or undue means in the procurement of the award; (ii) evident partiality or corruption in the arbitrators; (iii) the arbitrators’ misconduct by which the rights of any party have been prejudiced; or (iv) the arbitrators’ excess of their powers.[6] Importantly, Chapter 2 of the FAA ensures the application of the New York Convention in the U.S.[7]

As recognized by the U.S. Supreme Court, the FAA evidences “a national policy favoring arbitration.”[8] There are also state laws that regulate arbitrations related to commercial transactions within a single U.S. state. The FAA, however, overrides any state law that conflicts with it or undermines its policies. Some state schemes predate the FAA, including Article 75 of New York Civil Practice and Rules (“CPLR Article 75”), which served as the model for the FAA.

The involvement of the courts, and the scope of such involvement, in the arbitration proceedings, has an important effect on the dispute resolution process. The U.S. is widely regarded as having independent, experienced and neutral courts. A U.S. court must stay the trial of action if any suit or proceeding is brought upon any issue referable to arbitration, under an existing arbitration agreement, after it is satisfied that the issue at stake is in fact referable to arbitration.[9] The domestic application of the NY Convention provides for a similar outcome.[10] U.S. courts will also direct the parties to proceed to arbitration in accordance with their agreement.[11] Although the FAA is silent regarding preliminary injunctions, many state statutes recognize the courts’ power to order preliminary injunctions. For instance, New York’s arbitration statute, CPLR Article 75, empowers its courts to grant orders of attachment or preliminary injunction in aid of such arbitration both before the arbitration is commenced and while the arbitration is pending.[12] There is also an ample array of court decisions enforcing interim awards or orders for interim relief issued by arbitral tribunals or emergency arbitrators.

Freedom of contract is an established and well-recognized principle in the U.S. Because the FAA does not provide extensive procedural rules governing arbitrations, the contracting parties are free to choose the procedures and/or refer to the arbitration rules of recognized arbitral institutions. This choice will impact how is the arbitration administered and how, from a procedural standpoint, will it be conducted; parties entering into arbitration agreements should pay close attention to this point.  In the U.S., there are plenty of well-regarded arbitral institutions with the capability and experience to administer international arbitrations. This group of institutions includes the International Centre for Dispute Resolution (ICDR)—which is the international division of the American Arbitration Association (AAA); the New York International Arbitration Center (NYIAC); the International Institute for Conflict Prevention and Resolution (CPR); the International Chamber of Commerce (ICC); JAMS; and the Singapore International Arbitration Centre (SIAC), which was the latest global international arbitration institution to open a branch office in New York in 2020.

From a communication standpoint, an added benefit of having an arbitration proceeding in the U.S. is the possibility of protecting a document or communication from disclosure pursuant to two different types of privileges under U.S. law: (i) the attorney-client privilege and (ii) the work product protection. The attorney-client privilege aims to encourage full and frank communication between attorneys (both in-house and external counsel) and their clients, protecting communications between them that are made for the purpose of seeking or obtaining legal advice or assistance. The work product privilege aims to protect documents prepared in anticipation of a dispute or for trial. It encompasses factual materials gathered by the attorney as well as the attorney’s mental impressions, conclusions, opinions, or legal theories. It also expands to expert work products. From a strategic perspective, we note that foreign parties with U.S. counsel will have access to these privileges, which are more developed in the U.S. than in many other jurisdictions, especially civil law jurisdictions like Türkiye. We also note that there might be circumstances in which foreign entities advised by non-U.S. counsel might have access to these protections.

A key feature of arbitration is the selection of the seat of the arbitration. We will dive into the concept and importance of the arbitral seat in our next blog post.

The articles published by Dunning Rievman & MacDonald LLP are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice should always be sought separately before taking any action.

[1] Treaty Between The United States Of America And The Republic Of Turkey Concerning The Reciprocal Encouragement And Protection Of Investments, signed on December 3, 1985 and entered into force on May 18, 1990, available at Turkey Bilateral Investment Treaty (state.gov).

[2] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, available at ICSID_Convention_EN.pdf(worldbank.org)

[3] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, available at Conventionon the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)(the "New York Convention") | United Nations Commission On InternationalTrade Law

[4] The Federal Arbitration Act, available at U.S. Code: Title 9 | U.S. Code| US Law | LII / Legal Information Institute (cornell.edu)

[5] 9 U.S.C. § 2

[6] 9 U.S.C. § 10

[7] 9 U.S.C. § 201-208

[8] Jon O. Shimabukuro and Jennifer A. Staman, Mandatory Arbitration and Federal Arbitration Act, Congressional Research Service, September 2017, available at Mandatory Arbitration and theFederal Arbitration Act (fas.org)

[9] 9 U.S.C. § 3

[10] 1958 New York Convention, Article 2.

[11] 9 U.S.C. § 4

[12] CPLR § 7502, available at Legislation| NY State Senate (nysenate.gov)Legislation| NY State Senate (nysenate.gov)    

Tagged with: Dispute Resolution, Dunning Rievman & MacDonald LLP, Damián Vallejo, Joshua D. Rievman, International Arbitration, Federal Arbitration Act, American Arbitration Association, AAA, New York International Arbitration Center, NYIAC