In prior posts here at FITCH, we have discussed some of the reasons that parties choose international arbitration over litigation for their cross-border disputes. Over the next few months, we will be taking a deeper dive into the advantages of international arbitration (click here for our discussion on confidentiality). One such advantage is enforceability.
Perhaps the foremost advantage of international arbitration over litigation is that an international arbitral award is enforceable virtually worldwide, while a judgment from a national court is oftentimes only enforceable in the nation that issued it.
This fact is due to a landmark treaty, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. There are 165 parties to the New York Convention, including virtually every developed country on Earth.
The New York Convention requires parties to “recognize arbitral awards as binding and enforce them.” There are limited grounds in the New York Convention to deny enforcement of an arbitral award. Those are:
(a) that the arbitral agreement is not legally valid;
(b) that the party against whom enforcement is sought was not notified or allowed to present their case;
(c) that the award is beyond the scope of the parties’ agreement to arbitrate;
(d) that the tribunal was not properly constituted;
(e) that the award has been set aside at the arbitral seat;
(f) that the subject matter is not suitable to arbitrate; or
(g) that enforcement would be contrary to public policy.
By contrast, there is no international treaty in place for the recognition of foreign court judgments (while one was recently passed in 2019, it has not come into force, and shows no signs of having the international acceptance of the New York Convention). As a result, enforcement of a court judgment will differ depending on each country’s own rules and courts. The US and Western Europe will generally enforce each other’s court decisions, but enforcement in other countries is far more difficult.
China is a good example of this. There are only two times in history that a Chinese court has recognized and enforced U.S. court judgments. By contrast, a 2016 study showed that between 2011 and 2015, Chinese courts recognized and enforced 86.4% of international arbitral awards presented to them.
Particularly for those business deals where the counter-party (and their assets) are largely in a foreign country, international arbitration is the far superior dispute resolution mechanism because the New York Convention provides certainty regarding enforcement of any arbitral award.