An Alternative to U.S. Litigation
The Allure and Challenges of International Arbitration — an interview with Cedric C. Chao of Morrison & Foerster, LLP
David King | University of California, Davis, School of Law
Huy Luong | University of California, Davis, School of Law
Posted Monday, January 10, 2005
5 U.C. Davis Bus. L.J. 10 (2004)

Cedric C. Chao is a litigation partner at Morrison & Foerster LLP in San Francisco, California. He chairs the firm's international litigation and arbitration practice and co-chairs the firm's international practice. His area of practice focuses on commercial litigation, international arbitration, and complex criminal matters. Within these practice areas, Mr. Chao's clients range from Fortune 500 companies to small entrepreneurs.

Mr. Chao's extensive experience in international arbitration spans over two decades. He has led litigation teams in significant international and domestic commercial arbitration proceedings under a variety of prevalent arbitration rules including those of the American Arbitration Association, the International Chamber of Commerce, the London Court of International Arbitration, and the United Nations Commission on International Trade Law, and he has advised a team proceeding in an international arbitration administered by the China International Economic and Trade Arbitration Commission. Mr. Chao lectures on a number of topics including transnational litigation, international commercial arbitration, business crimes, corporate compliance, and minimizing the risks for foreign companies doing business in the U.S.. Moreover, Mr. Chao is the co-author of "International Arbitration: Selecting the Proper Forum," Mealey's International Arbitration Report (2002) and "Enforcement and Recognition of Foreign Judgments in United States Courts: A Practical Perspective," 29 Pepperdine Law Review 147 (2001).

Mr. Chao received his Bachelor of Arts in economics from Stanford University in 1972 and his Juris Doctorate from Harvard University in 1977.

Q: Why do some clients find international arbitration preferable to litigation in courts in the United States?

A: First, there is a great deal of uncertainty in having a complex business case decided by a jury with no specialized knowledge of your type of dispute and which consists of members randomly chosen from the voters registration list. In some cases, you might have individuals with no legal training or experience deciding a very complex question of science underlying the product or how much money should be awarded in damages. The worry is that the jury may not be grounded in commercial reality, which may generate a result that is off the charts.

Secondly, litigation in U.S. courts is very expensive because of our discovery rules. We are almost unique among the world's court systems in having party-initiated discovery where the judge plays a minimal role. As a result, lawyers work and bill more hours which translates into higher costs to clients.

The third reason relates to the problems which arise from the enforcement of U.S. judgments in jurisdictions abroad. Suppose an American company is suing a Chinese company in a U.S. court and receives a judgment award. Currently, there is no universal treaty that would enforce the payment of the award by the Chinese company. Some jurisdictions recognize U.S. judgments, while some may not. You avoid that problem in international arbitration. Any country, which has signed the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, has promised to all of the other signatory countries that it will recognize and enforce all valid international arbitration awards.

Lastly, an international arbitration can be mutually beneficial to both parties because of the option of holding the proceedings in an impartial forum. By definition, an international arbitration involves parties from two different countries. Both parties may have strategic reasons for wanting to avoid certain forums. Suppose an American company gets into a dispute with a Chinese company. The U.S. company typically would not want to have the arbitration in China, and the Chinese company would not want the arbitration to be in the U.S., so a neutral third forum is selected. In the past, Chinese parties would approve of Stockholm, Sweden, but more recently, they prefer to be in Asia. Hong Kong or Singapore have developed as good examples of forums which both Chinese and U.S. parties have found to be adequate impartial locations to carry out an arbitration.

Q: Please discuss the significant and unfamiliar challenges which U.S. attorneys might face in an international arbitration. First, how is preparing to argue in front of an arbitrator selected by both parties different from preparing to argue in front of a judge in a U.S. court?

A: When researching a U.S. judge, there is a significant amount of information about that judge's general attitudes that an attorney can obtain from the judge's written opinions and from colleagues. It's much harder to research arbitrators. International arbitration decisions are confidential and typically are not published. In light of this fact, it is difficult to research an arbitrator's views, philosophy, demeanor, and style. The only way to find this information is through other attorneys who have appeared in front of them. It is like shooting in the dark. There is no systematic way of finding that information..

Q: What difficulties arise in the discovery process in an international arbitration?

A: Actually, there is no deposition or discovery process in a true international arbitration. This could be a considerable disadvantage to attorneys who are used to our system. American litigators grow up on depositions - that is where they get trained, that is what they are used to, and that is where they get their facts. In international arbitration, there is no such animal. There may be limited circumstances, in which the impending death of a witness might call for a deposition. But this is rare. Typically, the first time you hear the opposing party's witness is when they testify during the proceedings of the actual arbitration. In addition, document exchange between the parties is limited. You go to trial knowing much less about the facts than if you were in a U.S. lawsuit.

Q: How do the procedural rules affect the manner in which an arbitration is carried out? Are there benefits and advantages to selecting one set of rules over another?

A: You can think of each set of rules as a separate language-there is no substantial benefit of one over another, they are just different. But I would like to point out an important exception. When arbitration is governed by the United Nations Commission on International Trade Law (UNCITRAL), the rules may play a significant role in the outcome. UNCITRAL is a loose set of procedural rules with no associated institutional structure like those of the American Arbitration Association (AAA) or the International Chamber of Commerce (ICC) where paid administrators keep track of the arbitration. If a controversy arises in a UNCITRAL arbitration, there is no strong central authority to help resolve the matter. I went through a scenario much like this in India. I was representing an American company against an Indian company who went through the local Indian courts to remove the presiding arbitrator. This move on their part was completely contrary to international arbitration principles and contrary to UNCITRAL rules. But, because there was no strong authority, we ended up having parallel litigations in the Hague, which we initiated, and the Indian Supreme Court, which the opposing party initiated, in order to resolve the dispute. This litigation alone took an entire year. After this proceeding, my advice to clients who deal in developing countries is to select procedural rules with a strong central authority where there is a paid staff that will administer the case, look over it, and have a mechanism for deciding disputes on procedural issues.

Q: Generally, how are final judgments in international arbitrations different from final judgments in U.S. courts?

A: Often in international arbitrations-and this may be a considerable disadvantage-arbitrators tend to split the baby. Arbitrators adhere to a principle called "looking to the equities of the case." Suppose a party has a clear-cut contract that would lead to summary judgment in its favor in a U.S. court. In this scenario, one party would walk away with everything and the other would walk away with nothing. This "all-or-nothing" result is much harder to attain in an international arbitration. Arbitrators have more leeway to look past the language of a contract in order to assess and award damages to both parties based on other factors like the out of pocket expenses that have been incurred. Whether that is good or bad really depends on the circumstances of your client. If you believe that your client can win without paying any damages in an American court, then arbitration is more dangerous because the arbitrator may ignore the contractual language and force you to pay something even though you wouldn't be required to under an official court judgment.

Conversely, if your client's case has a really weak legal basis but has a heart-wrenching story, then you may want to be in arbitration rather than in a U.S. court. It's a different way of thinking and as long as you know the differences, then you can pick your forum.

Q: What trends do you see developing in the field of international arbitration in the next 10-20 years?

A: I would say there is a trend towards more, not less, international arbitration over time. More specifically, I think that the American Arbitration Association (AAA) is going to have a bigger role. Ten years ago, the AAA was only prevalent in domestic proceedings. With the large number of U.S.-based companies that are consumers of international arbitration services and their familiarity with the AAA-style rules, there has been a push for AAA to be the clause of choice for American companies. Over time, I think the AAA will increase its percentage of the total international arbitration filings.

In addition, some other centers will continue to professionalize and gain the confidence of consumers. For example, I see significant growth potential for the China International Economic and Trade Arbitration Commission (CIETAC). By raw numbers they have a lot of filings, the second highest number of filings in the world behind the AAA. I think they are becoming more international and sophisticated. They are sending their staff abroad for training and reaching out to people in other countries to join their arbitration panels. I am actually on the international panel of CIETAC- I know them, and I think they have come up the curve very quickly. I predict CIETAC and the Hong Kong arbitration centers are going to continue to gain the confidence of the consuming public. You need that trust or people will stay away from you.