Data show the stakes are high and rising for international arbitration cases, and New York, as the sixth most popular arbitral seat (tied with Beijing), will certainly see its share of the action. As a global financial and commercial hub, New York meets the venue requirements of a variety of cross-border disputes with its neutral courts, well-developed body of complex commercial law, and deep bench of arbitrators, institutions and lawyers. New York is the leading U.S. venue for AAA-ICDR arbitrations with 153 cases in 2020, and U.S. nationals represent the second highest selected category of arbitrators after U.K. nationals with 220 appointments in the same year. New York’s pro-arbitration stance bolsters its attractiveness to parties from certain regions with nascent or burgeoning domestic arbitral seats, such as Latin America which is further discussed below. In this article, we spotlight some current trends across key industries and geographies that exemplify how international arbitration resolves a host of disputes, all of which indicate that New York’s strength as an arbitral seat of choice is unlikely to wane anytime soon.
International arbitration continues to be the most popular mechanism for cross-border dispute resolution. Early data released from the annual ICC Dispute Resolution Statistics report indicate that the global appetite for international arbitration, alongside other alternate dispute resolution methods, will not soon subside. The ICC preliminary findings both corroborate and add color to the unsurprising 90% of respondents in White & Case’s 2021 International Arbitration Survey who prefer arbitration—either standalone or in conjunction with alternative dispute resolution methods—to litigation, especially as businesses emphasize conserving capital and resources during economic uncertainty.
Although the number of cases registered by the ICC International Court of Arbitration—853 in total— was nearly on par with 2020 filings, the average amount in dispute increased markedly in 2021. In the nine-month period between January and October 2021, $184 million in dispute transpired (compared with $54.1 million for new cases filed in calendar year 2020). The 853 new cases comprise 2,206 parties hailing from 143 countries, of which the United States ranks first, followed by Brazil, Spain, the UAE and Mexico, respectively.
This year, we expect a new wave of arbitration cases in Latin American countries and related development of Latin American arbitral institutions and seats. We expect construction disputes to grow as the industry remains disproportionately affected by COVID-19. We also anticipate several arbitral tribunals will follow in the footsteps of major 2021 decisions (most recently in Tenke Fungurume Mining S.A. v. Katanga Contracting Services) and increasingly allow parties to recover legal finance costs.
As arbitration caseloads continue to rise, arbitral institutions are increasingly accepting funding alternatives as part and parcel of the process, and many have adopted arbitration financing rules in their international frameworks. Freshfields’ International Arbitration Top Trends in 2022 report points to a “convergence of favorable conditions” for arbitration funding, citing the pragmatic need of some parties to commercial arbitration to assess their capital allocation and liquidity. The majority of arbitration rules adopted in 2021 only require claimants to disclose the existence of arbitration finance and the identity of the funder, nothing more, much like Article 3.5 of Code of Ethics Appendix to the AmCham (Peru) Arbitration Rules (2021). The ICC—consistently the most popular arbitral institution worldwide—also adopted reasonable disclosure rules for third-party funding in recognition of the value and popularity of the practice.
Latin America Will Take Center Stage in 2022
Latin America has endured years of socioeconomic and political turbulence, further compounded by the pandemic’s devastation in many countries. While the Economic Commission for Latin America and Caribbean (ECLAC) reported 5.9% as its average growth estimate for the entire region in 2021, that number is expected to drop to 2.9% in 2022. International arbitration has gained popularity in Latin America through a confluence of factors, including repudiation of globalization and the pandemic’s exacerbation of political and economic divisions, according to a White & Case report on transition in the region. Given these factors, we anticipate a growing number of treaty and contractual arbitration cases in 2022. As the region holds a fifth of the world’s oil reserves, the extractive industry will likely experience the most disputes.
Countries whose economies are particularly dependent on oil and gas—Venezuela, Ecuador and Bolivia, to name a few—could be involved in a significant percentage of these disputes. Furthermore, the growing complexity of such disputes will involve foreign investors, many of whom will axiomatically turn to international arbitration.
The construction industry will see a similar growth in disputes, which is evident in the increase in activity around Latin American arbitral seats; São Paulo was the fourth most popular seat for construction disputes according to Jus Mundi’s most recent Construction Industry Insights report, indicating arbitration’s rise in the region. Miami—a hub for international companies that have a presence in Latin America—also gained in popularity in response to increasing numbers of cross-border construction disputes. It’s important to note that many upcoming disputes may also involve state and governmental entities. In a more recent example, the Mexican government requested bids for legal counsel in two upcoming investor-state cases in which the country is a defendant. Brazil, to cite another example, allows state entities to use arbitration, which explains why São Paulo frequently appears in transport system construction disputes.
In the Caribbean/Latin America region (as the region is delineated in the White & Case survey), New York emerges as the second most preferred arbitral seat, snagging 54% of respondents’ preference (topped by Paris at 64%). In one light, a putative positive aspect of Latin America’s protracted upheaval may be the increased acceptance and strengthening of Latin American arbitral seats, specifically those in Mexico City, Chile and São Paulo. Overall usage of arbitration in the region has significantly grown in the past two decades—between 2005 and 2015, the number of Latin American parties in ICC arbitrations rose by 131%, and the number of ICC arbitrators grew by 164%.
Construction disputes to Surge in MENA region
As global supply chains experienced severe disruptions in the past year, shortages in construction materials affected major international infrastructure projects everywhere and multiplied construction disputes. Construction in the Middle East and North Africa (MENA) countries has suffered extreme turmoil due to major multibillion-dollar projects in the region.
The pandemic’s effect on workforce restrictions, force majeure claims and project suspensions further strained an industry prone to uncertain cash flows. WCT Holdings Berhad and Arabtec Construction v. Maydan Group is one of the more recent examples of the size and scale of construction disputes in the region. Maydan Group reached a settlement agreement with WCT Bhd under which Maydan paid AED 726.5 million ($197.7 million) to resolve the contract dispute between both parties. Other major infrastructure disputes in recent years included DIPCO v. Damietta Port Authority, which involved $494 million in contractual fines; and DP World v. Djibouti, in which Emirati port operator DP World was awarded $533 million in a breach-of-contract dispute. Further, an arbitral tribunal of the London Court of International Arbitration has awarded over $200 million in interim damages to DP World and joint venture company Doraleh Container Terminal covering the period from Feb. 18, 2018 to Dec. 31, 2020. As foreign parties struggle to navigate local courts, international arbitration continues to serve as the best method to resolve cross- border disputes. In 2019, 18% of the 2,490 parties involved in ICC disputes came from the MENA region. In North Africa alone, the number of parties involved in ICC disputes has increased fourfold over the past two decades.
While arbitration financing has historically been uncommon in the MENA region, changing global attitudes toward funding alternatives and an unprecedented need to mitigate cost and risk have increased financing usage over the past few years. Cost continues to be the primary factor when deciding on pursuing construction arbitrations, according to the most recent Queen Mary report, “International Arbitration in Construction.” As the average duration of an arbitration can span over four years (based on 2020 awards) and cost millions of dollars ($7.49 million on average in 2020), we expect arbitration financing to be particularly valuable to parties in construction disputes.
Financing is a vital component to international arbitration
As arbitral rules under ACICA and ICC’s recent revisions expressly contemplate the award of funding costs to claimants, we can expect more instances in which parties are able to recover arbitration financing costs under “other” and “legal costs”. This was seen most recently in the 2021 Tenke Fungurume Mining S.A. v. Katanga Contracting Services decision. In August 2021, an ICC tribunal issued a final award against Tenke Fungurume that included $1.7 million in funding costs for financing that Katanga Contracting had obtained to offset the arbitration costs. The decision was later upheld by the U.K. courts in December 2021. While this is just the second publicly known instance of awarded funding costs in an ICC arbitration, several leading arbitral institutions outside of ACICA and ICC have adopted provisions in their international framework that make recovering funding costs possible. As Freshfields shrewdly observes, although no consensus exists among the major tribunals as to whether parties must disclose third-party funding, “the trend appears to be away from mandatory disclosure” for commercial arbitration proceedings.
While awarding of funding costs is more likely to be seen in commercial arbitrations in which funding costs are much lower than in treaty arbitrations, this is a huge development for parties in ongoing funded arbitrations. Nevertheless, it is more evident than ever that arbitration financing is now the norm—there were 249 funded arbitrations reported by law firms in the latest GAR 100 survey, a 66% increase from 150 funded arbitrations in 2019. Furthermore, the number of law firms using arbitration financing has also increased; 71 firms in the GAR 100 survey used financing, compared to 60 in 2020 and 53 in 2019. GAR 30 firms accounted for majority of funded cases (55.8%), indicating the importance of financing in large-scale, complex arbitrations.
2022 may be a defining year for the global arbitration landscape as more arbitration cases develop in new regions. Lasting effects of the pandemic will continue to prompt companies to seek liquidity, further stoking interest in legal finance for disputes. We may see additional instances of third-party funding provisions being part of the discussion in upcoming disputes, especially as it is adopted into the frameworks of more arbitral institutions around the world. New York, with its well-established framework and wealth of arbitrators, offers the efficiency and expertise to support the dynamic and expanding practice of international arbitration.
This article was originally published in New York Law Journal and can be found here.
Reprinted with permission from the March 18, 2022 issue of New York Law Journal. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.