Mark Pestronk
Mark Pestronk

Q: We have a new corporate account that has offices in the U.S. as well as in two other countries. We are going to use local travel agency members of our consortium as our subcontractors to handle the account in those countries. Here is the problem: The account wants our contract to provide that all disputes be settled by international arbitration. However, the local travel agencies would rather not agree to arbitration, preferring court litigation. The account claims that arbitration is now the usual way to settle international commercial disputes because it is faster, cheaper and fairer than litigation, but the local agencies disagree. Who is right here, and what should our position be?

A: It used to be widely believed that arbitration of cross-border disputes is definitely preferable to court litigation, but many international litigation experts have recently doubted that conventional wisdom. Arbitration can take years and can be more expensive than court in terms of legal fees and other costs, and it can produce unfair outcomes.

To illustrate, let's take a hypothetical contract dispute: Suppose the contract with the account provided that it would pay you an incentive of $100,000 after each year in which you met several criteria for good service. You claim that you met those criteria for three years in a row, but the account does not agree and refuses to pay.

If you and your subcontractors want to get paid the $300,000 that the account owes, and you cannot negotiate a resolution, where would it be best to bring the dispute? It would definitely be preferable to be able to sue in the court of your own city, where legal fees and court costs would be much lower than arbitration in a neutral forum such as London or Paris, which are the two most popular locales for international arbitration.

Besides the cost advantage, judges tend to decide based on the law and the facts, whereas arbitrators tend to split the difference and give each side at least a little something for their trouble. This outcome is completely unfair and unacceptable if you are convinced that your legal position is sound and that the other party's arguments are ridiculous.

On the other hand, arbitration could sometimes be preferable. Suppose all the transaction fees for three countries were initially paid to your agency, and then you distributed them to the other agencies. If a subsidiary of your corporate client in a country such as Mexico thinks that it overpaid you and demands a refund, it would be preferable not to get sued in Mexico, where the courts may well be slow and biased in favor of Mexican companies.

In that case, arbitration using a neutral arbitrator would certainly be better for you, even if it was more expensive than court litigation. So international arbitration obviously has pros and cons, depending on relative cost, speed and the fairness that you can anticipate from an arbitrator versus a judge.

All things considered, you are probably best off trying to provide for court litigation in your home city as the exclusive remedy. However, in my experience, you would probably need to defer to the wishes of the corporate account, which prefers arbitration.

If the foreign travel agencies object and insist on their local courts, arbitration may well be a good compromise to prevent a negotiation stalemate. Try to provide that arbitration will involve a single arbitrator instead of a panel of three, as the parties have to pay the arbitrators for their work. Specify a neutral location for the hearing, and designate the organization whose rules of procedure will apply.

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