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What is International Commercial Arbitration?

M. McGee
M. McGee

International commercial arbitration is a method of settling disputes between businesses residing in different countries without involving a formal legal system. This process is often a preferred method of handling problems, as the countries involved may have radically different legal systems. When international commercial arbitration is used, it is generally part of the initial contract between the two parties involved in the dispute. In most cases, an international arbitration firm that is unrelated to either of the involved parties performs the actual arbitration.

Arbitration is one of the oldest forms of settling disputes known to humankind. When two parties have an argument over the wording of a contract or the responsibilities of a person, an arbiter looks at the dispute and attempts to come up with a solution. The arbiter is usually a third party, someone completely unrelated to either claimant, so he won’t show any favoritism. When the arbiter makes his final decision, the involved parties are often contractually obliged to follow the ruling.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

The basics of international commercial arbitration are nearly identical to those of normal arbitration. At least one of the involved parties is typically a business of some sort, although the definition of a business in this case can be quite broad. Second, the two parties need to originate from different countries. Outside of these factors, an international commercial arbitration has all the hallmarks of a normal arbitration: a basic dispute, a third-party arbiter and an obligation to follow the final ruling.

Businesses use international commercial arbitration for two main reasons. The first major factor is speed; a decision made by an arbiter takes a fraction of the time that it would take for a local court. When a court is involved in an international commercial dispute, there are matters of jurisdiction and legal code to work out before the parties even reach the queue to begin waiting for a court date. There are fact-finding periods for the individual sides and other delays common to the basic process. Arbitration, on the other hand, is often relatively quick when both sides fully participate.

The other major reason to use international commercial arbitration is to bypass the local laws in one or both locations. Some countries have laws that give a clear advantage to one party in a dispute. This is especially common in developing countries that don’t have a robust set of international business laws. In order for some outside companies to deal with businesses in these places, they have to agree to forgo their local legal system.

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