The power of international arbitration amid supply chain disruptions

It is nearly common knowledge at this juncture that the supply chain disruption from Covid is unprecedented and continues, as wave after wave of new virus variants plague supply chains. The struggle to obtain raw materials, shipment delays, and operational challenges are among the gamut of reasons leading to an increase in disputes.

As a result, we are in a litigatory climate, particularly ripe for cross-border disputes arising from globalization. How businesses manage such disputes carries significant time, cost, operational and liability implications for all parties involved in the global supply chain.

International arbitration continues to be a preferred method for resolving cross-border disputes, particularly because of its efficiency and effectiveness for various reasons. For example, with arbitration, parties can select the location for the arbitration and what law and procedures will govern. Such a bespoke process insulates parties from the uncertainty of litigating in a foreign court, under foreign laws. With arbitration, parties can embrace greater flexibility in lieu of rigid judicial procedures, possibly resulting in limited discovery and relaxed evidentiary requirements. Arbitrations are confidential, which allows parties to preserve the privacy of their dispute and business transaction rather than having them become part of the public record. Finally, since most countries have joined the New York Convention, an arbitral award is readily enforceable in almost any country and without years of costly appeals.

Here are some conditions we are likely to see that will spark further uptick in global arbitrations.

• Soaring coasts and extensive inflation that carry beyond what parties anticipated when setting pricing policies in their contracts. When faced with such rising costs, companies can many times find relief in their own agreements to evaluate whether pricing, impossibility of performance, or force majeure provisions provide a mechanism to renegotiate the terms of the agreement. Otherwise, parties could agree to amend their agreements to address escalating costs and inflation. Where no agreement can be reached, parties may find themselves embroiled in a dispute.
• Global delays igniting use of termination provisions in contracts. When evaluating whether to terminate a contract, it is important to note if there is a time is of the essence provision, which allows for termination; otherwise, the contract may only entitle a party to damages and not termination. Timing is also crucial when deciding whether to terminate. If a party waits to long to select termination, it may unwittingly waive its right to do so and inadvertently legitimize the breach. If a party terminates an agreement, it may likely find itself pulled into a dispute.
• A rise of insolvency and parties unable to meet debt obligations. Parties can look for warning signs that an insolvency is imminent. For example, late or non-payments, requests for accommodations (changes to credit terms, increases in credit limits, etc.), fully drawn lines of credit, worsening working capital ratios, inventory issues, changes in key management, and restatements of financials or securities disclosures. If any of these red flags exist within the supply chain, parties should take steps to promptly minimize the insolvency’s impact on the overall supply chain, including evaluating and developing resourcing plans so that no one member of the supply chain is irreplaceable. Whatever mechanism is chosen to deal with the potential insolvency, it should be promptly implemented to avoid inadvertent and unwanted effects. While insolvency actions themselves are not resolved by arbitration, they can lead to supply-chain disruptions that trigger disputes amongst other links in the chain.
• Investor-state disputes resulting from increased protectionist policies and climate-change programs. Investor-state dispute settlement (ISDS) allows foreign investors to resolve disputes with governments through binding international arbitration. ISDS agreements are commonly found in international treaties between states, such as bilateral investment treaties, free trade agreements and sector specific treaties. They can also originate from domestic legislation and contracts. ISDS gives foreign investors a meaningful remedy when faced with unfair treatment by a host state. Disruptions in the global economy can lead to protectionist policies that unfairly impact investments and lead to increased arbitrations between investors and states.

Arbitration agreements continue to play a pivotal role in any dispute resolution framework and permit companies to increase their resilience to supply-chain disruptions.

Cristina Rodriguez, senior counsel for Wolfe Pincavage, represents clients in a wide range of business disputes and cross-border litigation and arbitration. She draws on her varied experience as both an advocate and a neutral to advise and assist clients in implementing workable solutions to their domestic and international disputes. She is licensed to practice law in Florida and can be reached at [email protected].

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