In negotiating contracts involving parties of different nationalities, businessmen and their counsel frequently have the opportunity of deciding whether or not to include a clause requiring disputes under the contract to be arbitrated. Sometimes decisions are made regarding the mode of dispute resolution without a full appreciation for the practical differences between international arbitration and litigation. This chapter focuses on those practical differences.

Arbitration is today a favored form of dispute resolution. The courts invariably enforce arbitration clauses, and, as of January 1, 1988, about 70 nations are parties to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Arbitration is a widely accepted form of dispute resolution for certain complex or technical disputes such as, maritime, construction or insurance cases, which are often heard by panels of industry members. In many types of international commercial contracts, however, there is no industry practice of resolving disputes through arbitration, and the parties have the option of including an arbitration clause or not.

Arbitration is generally thought by the bar and the judiciary as being speedier, more efficient and less costly than litigation in court. Arbitration also has a reputation for occasionally producing bizarre results which cannot be challenged in court. Litigation, on the other hand, is criticized as involving too much costly discovery and motion practice. When the parties involved in the business transaction are from different countries, each has a fear—perhaps quite justifiable—in being exposed to the courts of the other parties’ country. There is thus considerable appeal in having an alternative tribunal, perhaps one located in a third country.