By Peter V. Baugher and Steven M. Austermiller

Originally published in the ILLINOIS BAR JOURNAL/ OCTOBER 2000 / VOL 88

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As international business booms, Illinois lawyers are increasingly challenged to resolve business disputes between domestic and foreign parties. Attorneys drafting contracts that involve two internationally diverse parties must consider including arbitration, choice of law, and choice of forum provisions to prevent future entanglements in distant or unforeseen jurisdictions.

Lawyers should also be prepared to specify the dispute resolution rules that will govern and to appoint an organization to administer this process. Adding such clauses tailored to the transaction gives companies a road map for resolving disagreements and may help them preserve valuable business relations that would otherwise be jeopardized.

The new Illinois International Commercial Arbitration Act (ICAA)¹ provides comprehensive, easy-to-follow arbitration procedures recognized by the international business community. To conform to global business preference for arbitration, ICAA’s drafters based it on the UNCITRAL Model Arbitration Law (the United Nations "Model Law").² ICAA serves as an important instrument for handling the complexities of transnational disputes because it offers a legal framework accepted throughout the world.

Prior to the enactment of ICAA, Illinois companies seeking to arbitrate international business disputes had to rely on either the Federal Arbitration Act ("FAA") or the Uniform Arbitration Act ("UAA"), both of which have proved inadequate for international disputes.³ ICAA is specifically designed to apply to international business disputes and has a broad jurisdictional reach.

This article describes the expansion of international trade in Illinois and the circumstances that prompted the establishment of the Chicago International Dispute Resolution Association (CIDRA) and the enactment of ICAA. It also elaborates on the growing importance of arbitration in cross-border commerce, the creation of a legal infrastructure in Illinois geared toward transnational dispute resolution, and the key provisions of the new law and its role in facilitating international commercial arbitration.

II. Expansion of Global Commerce and the Growing Importance of Arbitration

As international commerce increases, so does the volume of international business disputes. Export sales in the top 10 Illinois industries were more than $31 billion in 1998, and import purchases undoubtedly exceeded that number. Additionally, new inbound and outbound foreign investment surpassed previous levels. Some of these deals will fail, and not all contracts will be performed as planned. As a result, Illinois lawyers can anticipate a growing number of clashes between domestic business entities and their foreign partners.

When an international trade contest erupts, at least two countries are likely to have jurisdiction over the dispute, and which nation’s laws apply may be unclear. This magnifies the importance of effective dispute resolution. It is crucial for both parties to plan how to work out problems at the same time they plan for contract performance. A legal framework that provides the parties maximum autonomy and control over the dispute resolution process reduces the risks of international commerce.

Most businesses are reluctant to be subjected to another country’s unfamiliar laws, legal process, jury systems, and discovery procedures. Some question the partiality of local judges and attorneys toward local business. There are also problems with the unpredictability of outcomes and enforcement of judgments from one country to another. Although a worldwide judgments convention is currently being negotiated in the Hague, its enactment any time soon is doubtful, and the U.S. is not presently a signatory to any treaty on recognition and enforcement of foreign civil judgments.

To combat these litigation difficulties businesses often voluntarily elect to arbitrate transnational disputes. The advantages of arbitration include: a conflict resolution mechanism chosen by the parties and tailored to their needs, a neutral decision-maker that often possesses professional industry expertise, a set of neutral, predetermined procedures, privacy, and a binding resolution, usually without appeal.

Arbitration permits parties from different countries to do business together without having to resort to one another’s legal systems. Likewise, arbitration is more likely than litigation to preserve the parties’ commercial relationship and end their dispute in a reasonably fair, quick, and cost-effective manner.

III. The Chicago International Dispute Resolution Association⁴

Increased international commercial activity in Illinois led to the establishment of CIDRA and the adoption of ICAA. Illinois lawyers engaged in these matters were keenly aware of the evolving world environment and believed that improving the climate for international arbitration and mediation in Illinois would help Illinois compete globally. They also knew that both domestic and foreign businesses involved in international trade and investment generally prefer arbitration to litigation for dispute resolution.

The first step was to form an organization that would enhance Illinois’ suitability as a forum for resolving transnational business disputes. CIDRA’s founders chose to locate in the Merchandise Mart at World Trade Center Chicago.

CIDRA was established in 1997 as an Illinois not-for-profit corporation intent on promoting international dispute resolution and improving Illinois international legal infrastructure. Next, CIDRA enlisted the assistance of the International and Foreign Law Committee of the Chicago Bar Association to draft a law that would encourage arbitration of international commercial disputes in Illinois.

Together they developed a statute that could provide guidance and default rules for parties who chose to settle their disputes by arbitration. The Illinois legislature recognized that enacting ICAA would assist the state’s determination to expand its role as a leading commercial center by providing a legal framework attractive to international businesses.

Parties electing to arbitrate their dispute in Illinois will be afforded the advantages of ICAA, which mirrors the UNCITRAL Model Arbitration Law.⁵ ICAA provides the requisite substantive legal framework for transnational dispute resolution while the CIDRA rules offer a comprehensive set of procedures.

In fact, CIDRA is the only arbitral organization that has purposely drafted its rules in light of ICAA. CIDRA also offers a Midwest-based neutral and private forum for international dispute resolution. Additionally, CIDRA maintains a roster of qualified attorneys and experts ready to serve as arbitrators, mediators, or fact-finders. Thus, international disputes governed by ICAA can now be conducted conveniently with CIDRA procedural rules in Illinois.

IV. Statutory Framework for Arbitration
     A. The New York Convention

The problems associated with litigation in foreign jurisdictions are not new. Attempts to offer a workable arbitration alternative have been made both internationally and in the United States. The most important multinational effort to enhance arbitration is the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention").⁶ The New York Convention provides that each signatory nation shall recognize arbitral awards as binding and enforce them according to the rules of the territories where the award is relied on under the conditions specified in the Convention.⁷

Before the New York Convention gained worldwide acceptance, it was difficult for parties to enforce an arbitral award outside the country in which the arbitration took place. Many foreign tribunals were reluctant to recognize arbitral awards rendered against their nationals. Furthermore, many foreign tribunals lacked the legal procedures to honor awards. Today, over 100 nations are signatories to the Convention.⁸ The United States ratified the New York Convention in 1970, enacting it as Chapter Two of Title 9, the Federal Arbitration Act, 9 USC sections 201-2O8.⁹

     B. The Federal Arbitration Act and the Uniform Arbitration Act

Despite its useful codification of arbitration practice on a national level, the FAA does not differentiate between domestic and international commercial arbitration.¹⁰ Moreover, the FAA leaves many gaps in the procedural rules that diminish the attractiveness of the United States as an international arbitration forum. The FAA does not discuss the use of experts, what language shall be used if not agreed to by the parties, whether oral hearings must be held, or the availability of interim or provisional remedies, for example.

Most significantly, the FAA has few default guides for parties unable to agree on the rules they wish to govern the tribunal.¹¹ Under that structure, the parties are forced to negotiate all possible contingencies and procedures or risk an arbitration that collapses before it can be completed. As a result, many turn to private institutions and rely on their rules. However, this expedient does not remedy the problem of gaps in the FAA commonly perceived and criticized by foreign counsel.

The FAA was never meant to "occupy the entire field of arbitration," domestic or international.¹² State legislatures may enact their own arbitration statutes, including provisions covering the conduct of international arbitration within their borders, provided that such enactments do not "undermine the goals and policies of the FAA."¹³ To fill the gaps in the federal scheme, states were forced to enact their own arbitration laws.

Early in the 1960s Illinois, along with most other states, enacted the Uniform Arbitration Act (UAA).¹⁴ However, only state arbitration laws that supplement the FAA and do not contradict its provisions are upheld.¹⁵

Even with the UAA, Illinois still lacked a statute addressing international commercial arbitration. The UAA offers even less guidance on international commercial arbitration than the FAA. Like the FAA, such relevant international trade terms as "commerce" or "commercial" are undefined in the UAA.

Furthermore, there is no indication that the UAA even contemplated international contracts containing arbitration provisions. Although the Uniform State Law Commissioners began a review of the UAA in 1997, the UAA’s overhaul is probably still several years away, and the extent to which it will treat international issues is unknown.

Eventually, some U.S. states began to enact their own international arbitration statutes. At least 13 states have now passed international arbitration laws: Illinois, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Maryland, New York, North Carolina, Ohio, Oregon, and Texas.

All of these states recognized that the expansion of trade and the growing importance of arbitration marked an irreversible business trend. On this basis, they adopted codes that seek to provide a hospitable and familiar statutory framework supportive of international commercial arbitration. The common motivating factor of these states is to facilitate trade by devising a legal framework for international dispute resolution so that foreign companies will be more inclined to do business in the United States and with U.S. companies.

In 1998, Illinois became one of the trend-setting states and adopted the Illinois International Commercial Arbitration Act.¹⁶ Like most of the other states’ laws, ICAA was strategically based on the United Nation’s Model Law to attract foreign businesses that were familiar with and trusted the Model Law. The worldwide acceptance of the Model Law was intended to strengthen Illinois’ position as a trading center suitable to companies from all countries.

V. The Illinois Commercial Arbitration Act
      A. The UNCITRAL Model Arbitration Law

The principal advantage of the Model Law derives from its international origin. Its overriding objective is to provide all jurisdictions that adopt it a comprehensive set of substantive rules to facilitate resolutions through private arbitration of civil disputes that are both (a) international and (b) commercial in character.

The United Nations General Assembly established the UN Commission on International Trade Law (UNCITRAL) in the late 1960s to promote the unification of international trade law on a global basis.¹⁷ UNCITRAL has achieved significant results in this field, including developing in 1976 its widely accepted UNCITRAL Arbitration Rules, and in 1980, a companion set of Conciliation Rules.

In 1982, the UNCITRAL Working Group on International Contract Practices began work on a Model Law on International Commercial Arbitration. The new law was to provide a model for national laws in countries without an arbitration law, or where existing law needed modification to conform to contemporary arbitral standards.

UNCITRAL’s policy goals in preparing the Model Law included the following: (1) to allow the parties the autonomy and freedom to choose how their disputes should be determined, and limit the role of national courts; (2) to establish mandatory provisions to ensure fairness and due process; (3) to provide a default framework, so that if the parties are unable to agree on procedural matters (such as the composition of the arbitral tribunal), the arbitration could still go forward; and (4) to further aid the enforcement of awards and arbitration agreements, and clarify controversial issues.

The Model Law was unanimously approved by UNCITRAL in 1985, and shortly thereafter the UN General Assembly voted to encourage nations to consider adopting it. To date, more than 20 countries have done so, including Australia, Canada, Cyprus, Germany, Hong Kong, Nigeria, and Singapore. Canada, Hong Kong, and Singapore are among Illinois’ largest trading partners.

Given the increasing number of countries that have adopted the Model Law, Illinois businesses seeking to penetrate emerging markets and maintain their business relationships with major industrialized nations are now able to bring to the table the same arbitration framework used by those countries.

To date, no case law interprets ICAA. The Act is new, and few arbitral decisions are ever publicly reported. Fortunately, most of the provisions are relatively self-explanatory, and some commentary is available on the Model Law.¹⁸

     B. Jurisdiction

Many businesses, both foreign and domestic, will benefit from ICAA. Its jurisdictional reach is broad because it applies to any international commercial arbitration where the arbitration is conducted in Illinois. To qualify as "international," one of the following requirements must be met: (1) the parties are internationally diverse; (2) the place of arbitration (Illinois) is outside of the country(ies) of the parties; (3) the place of arbitration is where the "predominant part" of performance or "subject matter of the dispute is most closely connected"; or (4) the parties agree that the subject matter relates to more than one country.¹⁹

Most commonly, ICAA would apply to a dispute between an American company and its foreign trading partner. ICAA can also apply to a dispute between two foreign/nondomestic parties. The parties could even be from the same country.

For example, two Toronto businesses that chose to resolve their dispute in Chicago could do so under ICAA jurisdiction. Two Illinois businesses that contract to resolve their disputes by arbitration may also find themselves subject to ICAA.

For instance, if Caterpillar were to sell a plant located in Mexico City to a Chicago firm, the Act would apply to any dispute connected with that sale as long as the parties had agreed that the subject matter of the arbitration (the plant sale) relates to more than one country. Practitioners should be mindful of this and consider inserting appropriate language into their contracts if they want ICAA to apply to their future arbitrations.²⁰

     C. Judicial Involvement

ICAA envisions minimal court involvement in the arbitration process. There is to be no court intervention in the arbitration except where ICAA specifically provides for it.²¹ Under ICAA, judicial intervention is permissible to appoint neutrals, decide challenges, and determine jurisdiction.²² Judicial intervention on these issues is not subject to appeal. The final and binding nature of these permissive judicial interventions is meant to break an impasse in an arbitration so that it can proceed as the contracting parties intended.

In the event of a dispute, the parties are to commence the arbitration without any court filings. If a party does file a complaint in court when there is an arbitration clause in the parties’ contract, ICAA directs Illinois courts to order the parties to begin to arbitrate, as long as the lawsuit defendant seeks to initiate arbitration no later than when it submits its first substantive pleading.²³

The Act does envision arbitration and court actions proceeding concurrently in certain circumstances. In addition, ICAA provides that a court may grant an "interim measure of protection" before or during the arbitral proceeding.²⁴ This refers to equitable remedies such as injunctions and protective orders. However, the arbitral tribunal will also have the power to order such remedies.²⁵ The only court with jurisdiction in an ICAA matter is the Illinois circuit court of the county where the place of arbitration is located.²⁶

     D. ICAA Procedures

An important role of the new law is that of "gap-filler." Because many contracts merely provide that disputes be resolved through arbitration, and possibly specify a choice of forum and choice of law, ICAA offers a default determination of a range of procedural issues. Lawyers should review these provisions during the contract drafting process as a checklist of points to consider and to make sure they will accommodate the client’s needs. To the extent that these provisions are undesirable, most can be avoided by inserting contrary language in the contract’s arbitration clause.

In the absence of such contrary provisions, the following ICAA rules apply:

• There is one presiding arbitrator. The circuit court of the appropriate county has appointment power unless the parties decide among themselves who serves as the arbitrator.²⁷
  
  
• If the parties have contracted for three arbitrators and fail to reach agreement on the appointment procedure, ICAA provides that each party shall appoint one arbitrator and that these two arbitrators appoint the third. If the two arbitrators cannot agree on a third, the court appoints the third. The court’s appointments under this Act are not appealable.²⁸
  
  
• The arbitrator must disclose “any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence.” Any party may challenge the appointment of an arbitrator based on that standard.²⁹
  
  
• The tribunal rules on its own jurisdiction over claims.³⁰ Objections to jurisdiction must be raised in the statement of defense.³¹ As with the challenge procedure for arbitrators, a party has 30 days from an adverse ruling on jurisdiction questions to a appeal to the circuit court.³² If the party misses that deadline, ICAA states “[t]he arbitral tribunal may,... admit a later plea if it considers the delay justified.”³³ The same rules apply for a plea that the tribunal exceeded the scope of its authority. The court’s decision on these issues is not appealable.³⁴
  
  
• The tribunal is to determine the rules of pretrial and trial procedure,³⁵ the place of arbitration,³⁶ the language to be used in the proceedings,³⁷ and whether there are to be any oral hearings.³⁸
  
  
• If a respondent fails to file a statement of defense, the tribunal shall continue the proceedings “without treating the failure in itself as an admission of the claimant’s allegations.”³⁹ This leaves open the possibility that such a failure could, coupled with other evidence, form the basis for finding admissions.
  
  
• With regard to experts, ICAA provides a hybrid between the American and continental legal systems. It states that the tribunal “may appoint one or more experts to report to it on specific issues to be determined by the arbitral tribunal.” The tribunal may even require a party to provide the expert with information, documents, or property to assist him or her. That is typical in continental or civil law countries, where the tribunal takes a more active fact-finding approach.
  
  However, ICAA also provides a common law twist. If a party requests it, the expert shall participate in a hearing where the parties “have the opportunity to put questions to the expert and to present [their own] expert witnesses. “⁴⁰
  
  
• The tribunal may issue subpoenas to parties or nonparties for the attendance of witnesses and for the production of books, records, documents and other evidence. ICAA states that production will be for the purpose of presenting evidence at the arbitration hearing and “will not include pretrial discovery as known in common law countries.”⁴¹ In certain circumstances, an evidence deposition may be taken. However, “[n]o other discovery shall be permitted unless otherwise agreed by the parties.”⁴²
  
  Again, the discovery rules are a mix between the American and continental systems. The prohibition of pretrial discovery is attractive to many non-American litigants, who view the permissive and wide-ranging pretrial discovery of the American system as costly, time consuming, and disruptive to companies unaccustomed to having to disclose information about their businesses.
  
  Additionally, the discovery limitation makes it more likely that the dispute will be resolved in a relatively short period. Thus, if the client would benefit from expansive pretrial discovery, his or her lawyer must insert the appropriate language into the controlling documents.

     E. Tribunal Findings

Unlike the other rules, the sections relating to the tribunal’s findings are quasi-substantive. The tribunal is to render its judgments on the basis of the “strict rule of law.”⁴³ The Act explicitly prohibits decisions based on anything else, such as amiable compositeur (equity and good conscience), unless the parties expressly authorize the panel to do so.⁴⁴ This provision is intended to assure that law, rather than vague appeals to equity or pressure to “split the baby,” will govern the arbitration.

Because of that, the choice of law issue is paramount. It should always be considered at the contract-drafting stage. ICAA provides that any choice of law, unless otherwise expressed, will be construed as referring to the substantive law of that jurisdiction and not its conflict of law rules.⁴⁵ With regard to conflict of law rules, the arbitral panel may apply any conflicts rules it considers applicable.⁴⁶ This differs from the typical American practice, where the conflicts rules of the forum jurisdiction automatically apply.⁴⁷

Significantly, when it comes to costs, the Act departs from American jurisprudence in favor of an approach found abroad. Unless otherwise agreed by the parties, the tribunal may award “costs,” in addition to the amount in dispute and interest.

Costs are defined to include “ (1) the fees and expenses of the arbitrators and expert witnesses; (2) legal fees and expenses; (3) any administration fees of the institution supervising the arbitration [such as CIDRA or the American Arbitration Association Association]; and (4) any other expenses incurred in connection with the proceeding.”⁴⁸

No fee-shifting clause is required in the parties’ contract for attorney fees and the other costs to be awarded. To the contrary, if a party wants to avoid fee shifting, it must specifically contract against it.

VI. Conclusion

Illinois practitioners should consider ICAA and CIDRA early in the negotiation of a cross-border business transaction to provide their clients with a blueprint for resolving disputes. ICAA gives Illinois a legal infrastructure that facilitates international commercial arbitration.

In turn, CIDRA offers the procedural rules and an Illinois-based forum for resolving international business disputes. Together, they provide Illinois lawyers and their business clients new ways to resolve disputes and arbitration mechanisms that are more certain, efficient, and closer to home.

Reprinted with permission of the Illinois Bar Journal, Vol. 88 #10, page 582, October 2000. Copyright by the Illinois State Bar Association.

1. 710 ILCS 30' I-1 et seq. back
2. 24 ILM 1302 (1985)Back
3. 710 ILCS 5’1. et seq. back
4. 200 World Trade Center, Suite 2400
The Merchandise Mart
Chicago, IL USA 60654
312-409-1373 (telephone)
312-701-9335 (fax)
[email protected] (e-mail) www.cidra.com (Web site)
Peter V. Baugher, president back
5. CIDRA’s Arbitration and Mediation Rules are available ai its Web site: back
6. 9USC§201. back
7. 9 Usc § 201; also see the Inter-American Convention on International Commercial Arbitration ("Panama Convention"), immediately following 9 USC § 301. back
8. For more, see the United Nation’s Web site at http://www.un.org/Depts/Treaty/final/ts2/newfiles/partboo/xxii_boo/xxii_I.html. back
9. 9 USC § I, et seq. 43 Stat 883. back
10. The FAA’s definition of "commerce" as "commerce" among the several States or with foreign nations does not provide a distinction. Additionally, the terms "commerce" or "foreign nation" never again appear in the statute. The later term is only indirectly implicated by the addition of §l5 in 1988, "Inapplicability of the Act of State Doctrine." back
11. 9USC§§ 1-14. back
12. Volt Information Sciences. Inc. v Board of Trustees of the Leland Stanford Jr. Univ., 489 U5468, 477, lO9SCt 1248(1989) ("The FAA contains no express preemptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. ) back
13. Id, 489 US at 478. Most procedural aspects of arbitration not addressed in federal statutes can be regulated by state or other local laws. back
14. 710 ILCS 5/1-5/23. back
I5. Allied-Bruce Terminix Companies. Inc. v Dobson, 513 US 265, 115 SCi 834 (1995) back
16. 710 ILCS 30/I-I et seq; sponsored by Rep. Elizabeth Coulson (R-Glenview) and Sen. Carl E. Hawkinson (R-Galesburg). back
17. 24 ILM 1302 (1985). back
18. UNCITRAL offers extensive online resources at www.uncitral.org. back
19. It is unclear what would happen if that contractual representation were objectively false, although the arbitrators do have authority to rule upon the tribunal’s jurisdiction. 710 ILCS 30/1-5(b). (c). back
20. 710 ILCS 30/15-5(a). back
21. 710 ILCS 30 1/25. back
22. 710 ILCS 30/10-10. 10-20, and 10-25. back
23. 710 ILCS 30/5-10(a). back
24. 710 ILCS 30/5-15. back
25. 710 ILCS 30/15-10. back
26. 710 ILCS 301-30. A dcfendant in an ICAA matter brought in Illinois state court might be able to remove to a federal court in Illinois with diversity jurisdiction (28 USC I 332). or under the Forcign Sovereign Immunities Act (28 USC §§ 1602. Ct seq.) back
27. 710 ILCS 30/10-5, 10-10(d). back
28. 710 ILCS 30/10-10(a)-(f). back
29. 710 ILCS 30/10-15. back
30. 710 ILCS 30/15-5(a). back
31. 710 ILCS 30/15-5(b).back
32. 710 ILCS 30/15-5(c). back
33. 710 ILCS 30/15-5(b) back
34. 710 ILCS 30/15-5(c). back
35. 710 ILCS 30/20-10. back
36. 710 ILCS 30/20-15. back
37. 710 ILCS 30/20-25. back
38. 710 ILCS 30/20-35. back
39. 710 ILCS 30/20-40. back
40. 710 ILCS 30/20-45. back
41. 710 ILCS 30/20-50. back
42. Id (emphasis added). back
43. 710 ILCS 30/25-5(c). back
44. Id. Although the arbitrators are able to “take into account the usages of the trade applicable to the transaction.” 710 ILCS 30/25-5(d). back
45. 710 ILCS 30/25-5(a). back
46. Id. ILCS 30125-5(a). back
47. See, e.g., Mass. Bay Ins. v Vic Koenig Leasing, 136 F3d 1116, 1120 (7th Cir 1998). back
48. 710 ILCS 30/25-20(i). back