International Construction Arbitration: When Cultures Collide

To stay competitive in the global marketplace, companies increasingly find that they must do business in a foreign country or with a firm having an international presence. When international disputes arise there's a forum that exists to resolve these disagreements: international arbitration.

We live in a global marketplace. To stay competitive, companies increasingly find that they must do business in a foreign country or with a firm having an international presence. In the construction industry, for example, one might encounter a project being performed in South America, where the owner is headquartered in the United States, the engineering, procurement and construction contractor is a European-based company headquartered in Spain, the actual engineering is performed in India, materials are fabricated in China and Korea and shipped to South America, and the main subcontractors hail from Argentina. Although welcome economically, this convergence of cultures creates new and often unprecedented complexities when disputes inevitably arise. The good news is a forum exists to resolve disagreements when business cultures collide: international arbitration.

International arbitration offers a private, binding method of dispute resolution not tied to a particular country’s national laws or legal system. In many parts of the world, international commercial arbitration already has become the preferred method of resolving international business disputes. Forums which now exist include the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), and the American Arbitration Association (AAA). As an added service to companies engaged in international business ventures, several international associations, such as The International Federation of Consulting Engineers (FIDIC), publish a variety of standard construction form contracts drafted specifically for use on international projects.

Arbitration is often touted as a quicker and cheaper method of dispute resolution than litigation, which can be extremely costly and time-consuming. In practice, international arbitration, especially for complex construction matters, may in fact be neither quick nor cheap. There are still, however, many advantages. First and foremost is the neutrality of the forum. Since the parties can specify by contract not only the arbitral organization, but also which arbitrators, the powers of the arbitrators, the location of the arbitration, and the applicable law(s) the arbitrators will apply to the dispute, companies avoid the prospect of having their dispute resolved by foreign courts under unfamiliar laws and procedures. International arbitration also prevents one side from gaining the “home-court advantage” were the dispute to end up in that party’s national court.1

Second, international construction arbitration is highly flexible. For example, although the chosen international arbitration institution’s headquarters may be located in Paris or London, the actual transnational construction arbitration proceeding can be scheduled and conducted anywhere in the world. There also is no requirement that only attorneys admitted to the particular international arbitral body may appear before it. Therefore, the parties can use their own lawyers without having to engage “local” or “specialized” counsel.

When choosing international arbitration, however, companies must be alert not only to the advantages, but also to some of the “differences” encountered in an international forum. These differences arise principally from the nature of transnational dispute resolution, which brings together parties, witnesses, experts, lawyers and arbitrators from many different parts of the world. The process can be a melting pot not only of social and cultural mores, but legal traditions as well.

While the benefits of international arbitration include a neutral and impartial forum, procedural flexibility, and the possibility of a timely resolution to disputes, differences between common-law and civil-law participants undeniably impact the process and may indefinably alter desired outcomes. Although much progress has been made in the harmonization of procedural patterns, and many commentators have heralded the appearance of a new lex mercatoria (a body of uncodified but widely recognized international trade rules), arbitrators and lawyers from different nations inevitably bring with them a wide range of diverse legal traditions.

Cultural considerations in the international arbitration process are most evident in the interplay of common-law versus civil-law regimes. Generally, the American common- law system of jurisprudence is of English origin, derived from ancient English local rules and customs, as well as the medieval Law Merchant (a body of law governing commercial transactions). Similar to the historic Law Merchant, the common law does not consist of definite, absolute rules prescribed by a legislature, but is rather a flexible body of principles developed by the courts and designed to meet and adapt to new situations, practices and changes in trade or commerce. The authority of the common-law rules does not depend on affirmative statutory enactment, but on general reception and usage, in the interest of justice. Common law is just that — law. And it controls until it is modified or overruled by a new declaration on the subject, or by express legislative enactment.2 The common-law tradition places a great deal of significance on the oral questioning of witnesses, where the truth is ascertained by a thorough and sifting cross-examination, conducted, in an adversarial process, by lawyers for each side to the dispute.

In contrast, the predominant legal tradition in continental Europe remains the civil system, which is based historically on post-classical Roman law, specifically the Code of Justinian. A distinguishing feature of modern civil law is that it is codified, or written down in code books. This codification is rooted in 18th century rationalism and purports to lay out “the whole law” in a cohesive and systematic format.3 Civil-law attorneys as a rule submit statements or documents to the court or tribunal, which then ascertains the truth on its own.

In international arbitration, cultural differences lie most visibly in the following areas:

  1. Evidence Gathering. Initially, international arbitration shunned American-style “discovery,” restricting the evidence-gathering process in keeping with the civil-law tradition. With time, international arbitration’s reluctance to allow fact gathering has abated somewhat and limited document discovery now has become routine. The “fishing expeditions” endemic in American-style discovery, however, are not usually permitted: requests for “all documents, correspondence or memoranda” without limitations are rarely seen, and hardly ever granted.4 Discovery from unaffiliated third parties also is infrequent, as is the concept that every witness must be deposed — i.e., interrogated by opposing counsel — before he or she appears at a hearing. Instead, in international arbitral proceedings, one frequently sees witness statements prepared by the parties and distributed ahead of time, giving the arbitrators and opposing counsel an idea of who the witness is, what the witness knows, and how he or she came to know it. This leaves more time at the hearing for the arbitrators or opposing counsel to question the witness personally.5
  2. Examination of Witnesses. Another area of conflict between the civil and common-law traditions is in the area of cross-examination. Civil-regime lawyers inevitably experience great dis-comfort if American or English techniques or approaches are adopted as part of the arbitration procedure.6 As previously mentioned, the common-law tradition places foundational significance on oral testimony as a vehicle for proving the character, veracity and reliability of witnesses, whereas civil-law lawyers tend to rely on statements or documents that can be submitted to the tribunal. There has been significant debate in the international arbitration community about whether witness examination should be conducted by the arbitrators — on the model of European judges — or by the parties’ counsel. By and large, harmonization efforts have resulted in a fairly workable compromise, whereby skilled common-law lawyers may, through limited cross-examination, highlight for the tribunal the three or four significant problems they see in an opposing party’s witness statement. And continental lawyers have for the most part learned how to do at least a moderately effective, albeit limited, cross-examination. Arbitrators continue to be able to ask their own questions for purposes of clarification and have realized that they do not lose control over the proceedings by tolerating limited cross-examination by counsel.7
  3. The Inquisitorial Tribunal versus the Adversarial System. Traditional continental European tribunals take the lead role in ascertaining the facts and the law. The continental tribunal has the responsibility of investigating the facts which have been alleged, and for examining the witnesses. Litigation and arbitration in common-law countries, however, remains adversarial: the truth is ascertained by each side presenting evidence and testing that evidence through cross-examination of relevant witnesses. The common-law tribunal or court performs much more of a referee role, ruling on motions, admitting evidence, handling objections, instructing the jury, if present, but generally relying on the lawyers to cite the applicable law and to present their version of the facts. A harmonizing approach permits the tribunal to allow cross-examination and any redirect examination before tribunal members put their questions to a witness. Tribunal members, in the civil fashion, may still investigate matters that neither side may have viewed as central to their presentation. Parties are allowed to put forward their case, however, without undue intervention from the panel. Even if a tribunal member’s questions rise to the level of witness rehabilitation, recross-examination also can serve as a valuable balancing mechanism for the common-law lawyer.8
  4. Written Submissions. Much progress has been made in the area of comprehensive, written submissions in international arbitration. While common-law lawyers are more comfortable with extensive oral argument, they generally have adapted well to producing detailed written factual documentation to help prove their case. This includes detailed witness statements, experts’ reports, and written briefs on specific issues. A potential area of conflict remains, however, when a party refuses to produce relevant underlying documents. Without discovery or compelled production, the arbitrators must strive to ensure all critical documents are available so that the arbitration process is meaningful. If the party is not forthcoming, and the tribunal merely notes an adverse inference, the outcome of the arbitration process inevitably is affected.9
  5. Evidence Adduced Through Experts. The “battle of the experts” is an unknown concept in civil-law systems. Lawyers in continental Europe are much more familiar with the practice of tribunal-appointed experts. In this area, the English system parallels more closely the civil- law practice than the American approach. In the U.S., experts are usually selected by the parties, with the net result being that judges and juries often must choose between diametrically opposed expert viewpoints. While American judges are permitted to call their own expert, in practice this is rare outside of products liability actions or where the subject matter requires the testimony of someone with a high degree of technical or scientific training or expertise. In international arbitration, the tendency has been to follow the European approach.10 Parties may comment on the expert’s report, but the tribunal normally retains ultimate control over the report process.
  6. Assessment of Costs. Differing approaches unhappily coexist in the area of costs as well. In England, the legal costs of the prevailing party are borne by the losing party, in addition to any judgment on the merits. Where costs are disputed, the court makes a detailed assessment following the judgment. The “loser pays all” concept also is recognized in continental Europe, where the trial judge normally estimates what he or she believes the costs of the prevailing party should have amounted to. This “loser pays all” approach is generally foreign to lawyers trained in the U.S., where attorneys’ fees and costs are often requested, but infrequently granted.

The harmonized practice that is emerging in international arbitration follows for the most part the civil-law jurisdictions, where recovery of costs is permitted under the applicable law or rules, and the losing party bears the costs of the prevailing party. The tribunal simply assesses the legal costs and includes them in the final award.11

As an alternative to national forums where the playing field may not always be level, international construction arbitration presents an opportunity for dispute resolution free from national pressures or bias. Despite the general march towards harmonization of divergent approaches, however, practitioners often remain strongly influenced by and devoted to the procedures of their own legal systems. There remains, therefore, a serious need for mutual understanding and common ground.

Companies choosing to specify international construction arbitration for resolving contract disputes would do well to consider carefully ahead of time what works best for them. Being cognizant of their opponents’ and arbitrators’ legal framework and cultural traditions might help them understand the expectations each party brings to the arbitration process. This extra edge can serve as an additional arrow in their quiver as they seek to resolve their differences and successfully interact with parties of different cultural and legal backgrounds through the international construction arbitration process.

ENDNOTES


  1. Terry F. Peppard, New International Evidence Rules Advance Arbitration Process, 73-MAR Wis. Law 18 (2000). 
  2. 15A C.J.S. Common Law Section 2 (1967). 
  3. Peter G. Stein, Roman Law, Common Law, and Civil Law, 66 Tul. L. Rev. 1591, 1594 (1992). 
  4. Julian D.M. Lew & Laurence Shore, International Commercial Arbitration: Harmonizing Cultural Differences, 54-AUG Disp. Resol. J. 33, 33 (1999). 
  5. Andreas F. Lowenfeld, Introduction: The Elements of Procedure: Are They Separately Portable?, 45 Am. J. Comp. L. 649, 654 (1997). 
  6. Lew & Shore, supra note 4, at 33. 
  7. Lowenfeld, supra note 5. 
  8. Lew & Shore, supra note 4, at 35. 
  9. Id. at 35-36. 
  10. Id
  11. Id. at 38.