Originally from The American Review of International Arbitration (ARIA)

PREVIEW

I.  INTRODUCTION

The present article was inspired by the announcement of Claudia Salomon’s Charles Brower lecture.  The catchy title of the lecture, “From Wannabe to Where to Be: Becoming the Next Arbitration Capital” and Salomon’s explanation, “I will discuss what it takes [for] a city to be a preferred seat in international arbitration,” wisely directs attention to certain cities and not to national arbitration laws. Thanks to the great success of the New York Convention of 1958 and the UNCITRAL Model Law, national arbitration laws are today very similar. Of course, the remaining differences matter, but they are far from sufficient to explain the rise of certain cities that actively seek to be chosen as seats of arbitration.

So, if the arbitration law is not (alone) decisive, then what are the factors that really shape the market for seats of international arbitrations? Answering this question from an economic and legal perspective is the task of this paper. In the tradition of Ronald H. Coase, we will build on the analytical framework provided by New Institutional Economics.

II. WHAT SHAPES THE MARKET FOR THE SEATS OF INTERNATIONAL ARBITRATIONS?

A.  Markets and User Preferences

All markets are characterized by supply and demand. The market for seats is no exception. Arbitration users (mainly business entities) constitute the demand side of the market, while cities that are seeking to host international commercial arbitrations form the supply side. In order to analyze the market, we need first to understand the preferences of the users. Hence, we have to figure out what factors matter for them when choosing between different cities that compete on the market for seats.

Notably, the choice of the seat is typically made when signing the contract that structures and organizes the business transaction. The preferences that prevail at this moment in time (ex ante preferences) determine the choices made by the parties in the contract and in the arbitration agreement. Obviously, once the dispute has emerged, preferences may change.

It might happen that one of the parties, typically the respondent, would prefer to have chosen a seat (i) where arbitrations tend to last longer than in the selected place and (ii) where the chances of vacating a negative award are higher. However, the ex post preferences of the parties are by nature very dispute-specific and opportunistic—of course, each party wants to win the arbitration. Otherwise, a rational party would surrender and not give cause to additional sunk costs which are in general terms the costs of a useless investment or more specifically the costs of an arbitration that is (almost) impossible to win. However, under normal circumstances, ex post preferences do not impact the original choice of the seat, because they are in the moment of signing the arbitration agreement largely unpredictable and difficult to communicate to the counterparty. We will not consider the ex post perspective in our analysis but focus on the ex ante preferences of users.