In this second instalment of an exclusive legal series on Luxury Society, international law firm Baker & McKenzie explains the advantages of international arbitration as dispute resolution for luxury companies.
Last year, the Luxury and Fashion practice group of international law firm Baker & McKenzie launched the Global Legal Guide for Luxury and Fashion Companies, the first-ever comprehensive global guide to all legal matters relating to the $254 billion industry. It includes contributions from more than 225 lawyers and economists across its global practices.
In the second of this ongoing and exclusive series with Luxury Society on luxury legal issues, Baker & McKenzie summarises a detailed chapter, included within the Guide, on why international arbitration is an attractive strategy for luxury companies to control disputes from a global perspective.
“ International arbitration has emerged as an attractive strategy to control disputes from a global perspective ”
With risk mitigation at the forefront of many companies’ minds, especially luxury brand owners, international arbitration has emerged as an attractive strategy to control disputes from a global perspective.
Using arbitration, companies can control the costs of litigation, contain the potential impact of public disputes on brand reputation and select a favourable jurisdiction in which disputes will be resolved. Notably, the majority of claims that arise in the luxury and fashion industry involve intellectual property disputes (i.e., trademarks, copyright, counterfeiting, trade secrets).
However, disputes can also involve product liability claims, data privacy claims, and contractual disputes between brand owners, manufacturers, suppliers and distributors. Each of these potential litigation risks can be managed to varying degrees using international arbitration.
“ Unlike mediation, the goal of arbitration is to have a chosen adjudicator make a substantive decision that is binding ”
International arbitration is private, binding litigation before a chosen panel. Unlike mediation, with which it is often confused, the goal of arbitration is not to reach a voluntary settlement between the parties, but to have a chosen adjudicator make a substantive decision that is binding on the legal issues and the facts, and enforceable against the parties regardless of whether they agree with the result.
International arbitration arises out of a written agreement between the parties that is established before a dispute arises. International arbitration may also be brought on the basis of a written investment treaty to which a particular country is a signatory. The arbitrator or panel of arbitrators are chosen either by the parties themselves or by an arbitral institution who appoints the arbitrator(s). The arbitrator decides both questions of law and fact.
The process is more streamlined than litigation in that the parties conduct the majority of the proceedings through written submissions, including witness testimony, rather than through oral presentations.
Discovery is usually very limited; for example, it might be confined to the documents that each party intends to rely upon to prove its case, or disprove its opponent’s case. The process can easily be tailored according to the particular dispute at issue, including bifurcating the legal issues from facts or the question of liability from damages.
A final hearing takes the place of a trial, occurring in private conference facilities with testimony usually limited to that of cross-examination of witnesses and experts and without the constraints of strict rules of evidence.
Lastly, the final decision and award is binding on the parties and enforceable in most developed countries around the world having nearly the same force as a court decision.
“ For companies operating globally, international arbitration offers a number of advantages ”
For companies operating globally, usually the case for companies in this industry, international arbitration offers a number of advantages.
Most importantly, if the company is exposed to litigation in front of a foreign court or tribunal or in front of many different foreign courts or tribunals, international arbitration provides the company with a choice, in advance, of where future disputes will be adjudicated.
This is because the choice of jurisdiction can be agreed upon by the parties at the outset of their contractual relationship in an arbitration clause placed in the parties’ agreement. In the fashion and luxury industry, such clauses could be placed in joint venture agreements, licensing agreements, outsourcing agreements, manufacturing agreements, purchasing agreements, etc.
“ International arbitration avoids costly disputes over jurisdiction & gives some predictability to the process ”
The parties can agree upon the jurisdiction that may be more favourable to them, and avoid jurisdictions that appear to be undesirable or lack independence or impartiality. For example, some jurisdictions may have a more developed body of law in the intellectual property field or be less susceptible to corruption. International arbitration permits the parties to avoid costly disputes over jurisdiction and gives some predictability to the process even though future disputes are inherently unpredictable.
International arbitration also affords the parties the opportunity to have a decision made by someone with experience in the industry or in a particular area of law. The majority of international arbitrators are very highly qualified attorneys or former judges, many of whom had successful private practices before becoming arbitrators.
The arbitrators can, accordingly, tailor the proceedings to meet the particular needs of the parties and increase the likelihood that a decision will be made timely with less disruption to the parties’ business operations.
Parties can also use international arbitration clauses to agree upon the language in which a dispute will be decided, the restrictions on the type of damages or awards that might be made in the event of a dispute, and the procedures with which they are most familiar.
International arbitration is also private and often confidential so that written submissions, witness testimony and expert reports that may contain sensitive information are not available to the public or the media. In addition, decisions in arbitration do not set precedent for future arbitrations between different parties.
In the intellectual property context, international arbitration can afford the parties a single forum in which to resolve disputes over multiple forms of intellectual property registered in multiple jurisdictions. This permits parties to avoid litigation over patents, trademarks, copyrights, and the like in different jurisdictions with different applicable laws and avoid the risk of being exposed to inconsistent judgments and redundant legal procedures and expenses.
“ Parties can choose a location or venue for the arbitration hearing that is neutral and unrelated to either party ”
While the list of factors that may impact a company’s decision to utilise international arbitration exceeds the scope of this article, a few key points are worth mentioning.
For instance, the parties should choose a governing law that has a natural connection to the parties or their business activities in order to avoid later challenges to the enforceability of the award or scrutiny from arbitrators or courts.
However, the parties can choose a location or venue for the arbitration hearing that is neutral and unrelated to either party or the governing law of the arbitration.
“ Arbitration should to be managed by an established arbitral institution & incorporate a set of procedural rules ”
At the same time, the parties should confirm that the particular issues they wish to send to arbitration are arbitrable. “Arbitrability” refers to whether the applicable law allows a matter to be determined through arbitration. As an example, some jurisdictions require that questions of patent invalidity be determined only by the government entity that issues the patent.
The parties should also agree for arbitration to be managed by an established arbitral institution and incorporate a set of procedural rules that will govern the arbitration. Many international arbitral institutions provide procedural rules or model rules that can be incorporated by reference into the arbitration agreement. UNCITRAL, ICC, LCIAC, ICDR and SIAC, are some examples of such institutions.
These institutions permit the parties to avoid developing their own set of ad hoc rules that could result in additional disputes. A number of these institutions provide methods for interim relief (i.e., emergency and injunctive relief) or even example appellate procedures. Accordingly, parties should carefully consider which institution may best fit their future needs and expectations.
Another important consideration is the selection of arbitrators. Many arbitral institutions provide procedures through which the institution itself can appoint an arbitrator or a panel of arbitrators.
Often, each party will agree to appoint one arbitrator with the two selected arbitrators given the responsibility of appointing the third, chairperson of the arbitration panel.
The decision to employ one arbitrator or three may depend upon the parties’ appetite to cover the cost of multiple arbitrators. However, most large, global companies prefer to have a set of three arbitrators in order to avoid having one arbitrator make a mistake in law or miss a key fact in rendering a decision.
“ Companies in the fashion & luxury industry should utilise international arbitration as a way to control litigation risks ”
A panel of three arbitrators might also provide arbitrators with more confidence in their decisions, especially when making difficult decisions on substantive issues that will be binding on the parties.
In summary, more companies in the fashion and luxury industry should utilise international arbitration as a way to control litigation risks in the global marketplace.
To read more about what to consider when employing this litigation alternative, and other issues impacting cross-border and multi-jurisdictional disputes, request your copy of the Global Legal Guide.