Introduction

The North American Free Trade Agreement concluded in December 1992, between the United States of America, Mexico, and Canada ("NAFTA") provides a number of methods for the settlement of disputes arising within the NAFTA area.

With respect to disputes between member States, the NAFT A provides a dispute settlement mechanism modelled largely on that which is already established under the Free Trade Agreement (the "FTA") between Canada and the United States of America, in force since 1 January 1989, providing in particular for the constitution of binational panels (Chapter 20).

The NAFTA goes further than the FTA by providing for direct arbitration between an investor and one of the member States. An investor may submit its dispute to international arbitration according to the rules of either the International Centre for the Settlement of Investment Disputes (ICSID) or the United Nations Commission on International Trade Law (UNCITRAL).

Finally, Article 2022, paragraph 1 of the NAFTA includes an important statement of principle:

"1. Each Party shall, to the maximum extent possible. encourage and facilitate the use of arbitration and other means of alternative dispute resolution for the settlement of international commercial disputes between private parties in the free trade area."

No similar provision is found within the bilateral FTA. Why is international commercial arbitration being promoted in an international treaty which. once it is ratified by its three signatories, will serve as the legal framework for the creation and development of an immense free trade zone?

To respond to this question, one must examine the role arbitration plays in international business.

What Is Arbitration?

Arbitration is basically a form of private justice based on an agreement concluded for such a purpose between parties to a dispute. The jurisdiction with which an arbitrator is entrusted is analogous to that of an ordinary judge except for the fact that this jurisdiction is derived from a contract.

When parties agree to arbitration they automatically exclude the jurisdiction of the courts of law. Where the parties provide as such, an arbitral award can, in principle. be final and beyond review by the courts. However. regardless of any such agreement, if one of the parties refuses to comply with the arbitral award. the other party must resort to enforcement procedures provided by law as it would in a similar situation involving a decision from a court of law. For such enforcement of the arbitral decision, it is necessary to submit to the jurisdiction of the courts.

While arbitration is a private form of dispute settlement based on a contract and precluding the jurisdiction of the courts, the enforcement of any arbitral awa1rd must be provided by the courts. Arbitration cannot function effectively without recognition by national legislation. Furthermore, the administration of justice is considered one of the prerogatives of the State and the State finds itself having to regulate arbitration lo the extent that such private initiative encroaches upon its prerogative. As a result, arbitration laws have been developed throughout the world and international arbitral conventions have been concluded, of which the two most significant are the June 10, 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") and the April 21, 1961 Geneva Convention entitled the European Convention on International Commercial Arbitration.

The reasoning behind Article 2022, paragraph I of the N AFTA therefore becomes clearer: without the intervention and cooperation of the member countries to the NAFTA, international commercial arbit1ration will not develop within the NAFTA territory. But it remains to be examined why it is desirable to encourage arbitration in North America.

What Purpose Does Arbitration Serve?

There are several reasons why arbitration is generally considered the most favoured method of dispute resolution in international commercial matters. The most compelling reason is that it is a method which enables the parties to choose their "judge", thereby assuring them a certain degree of control over the jurisdictional process which may in turn facilitate the enforcement of the decision obtained. This makes arbitration a necessity under the NAFTA.

(i) Achieving a Settlement

In terms of contractual strategy. arbitration is first or all a form or compromise. Obviously the desire of each party is to propose that any dispute, present or future, be submitted to the jurisdiction of its own national courts. As each party wants that which the other is automatically loathe to concede, it is generally necessary to agree upon a more '"neutral" solution. Arbitration appears like a natural compromise as it avoids. in theory, the influence of the domestic courts of both parties. It must be appreciated that within the context of the NAFTA, the search for such a "neutral" decision-maker is likely to be a constant preoccupation for the private sector given the dominant position of the United States of America.

(ii) Qualifications of an Arbitrator

Arbitration is particularly desirable in light of the considerable benefits which arise from the fact that the arbitrator is a ''judge" selected by either the parties themselves or the institu1ion entrusted by the parties with the administration of the arbitration:

• An arbitrator should be independent and impartial. This factor is one of the "raisons d'être" of arbitration.
• An arbitrator is selected on the basis of his or her professional qualifications, international experience, and availability: the parties have no control whatsoever over such factors when a court of law is seized of their case.
• An arbitrator is generally more disposed towards the resolution of the conflict for which he or she is specifically employed than a judge for whom the matter forms a part or his or her daily responsibilities. An arbitrator is selected and remunerated on the basis of the particular dispute submitted to him or her.
• An arbitrator is generally better informed regarding matters within the business world, particularly in an international context, than a State-appointed judge whose functions are obviously more diverse.

The ability to select their own arbitrator assures the parties of a result more appropriate to their needs. It also allows them to avoid the necessity of dealing with foreign judges who do not possess the necessary qualifications or background. This risk is considerable in the context of the NAFTA, given the different legal systems of the three members.

(iii) Control over the Arbitration Process

Since arbitration is private and contractual it is possible to provide a confidential and rapid settlement to a dispute according to terms defined by the parties. If the parties agree that their dispute should be settled quickly und confidentially arbitration is the only means of effecting the agreement as the parties can only partially control these factors in proceedings before the courts.

Arbitration also provides much flexibility:

• The parties may themselves choose the forum for the settlement of their dispute. The forum may be a neutral country which has nothing to do with the subject or the dispute or the parties involved. The ability of the parties to choose the forum for the settlement of a dispute could be of great strategic importance under the NAFTA given the immense size of North America
• The parties may similarly choose the language or languages to be used during an arbitration proceeding. They may select a language which is either foreign or common to all the parties, but most significantly they may select the language or the documentation involved, both contractual and non-contractual. The ability to select the language of the proceedings is a significant one in the context of the NAFTA considering the three national languages which exist: English, Spanish and French.
• The parties have the right to determine the procedural rules as well as the rules of evidence applicable to their dispute. These are considerable advantages which may permit to avoid the situation where one party is at a disadvantage because it is not familiar with the procedural and evidentiary rules of the country of its opponent. For example, the procedural and evidentiary rules in practice in the United States of America can appear to be inordinately complicated. if not unreasonable, to Mexican, Canadian, or European businesses having legal matters in an American jurisdiction.
• The parties always have the power to choose the law applicable to their contract and, consequently. to the dispute. When private parties contract, each lends to prefer the application of its own national law leading inevitably to a bargaining process which, under the NAFTA, could produce results which are highly unfair given the size of American multinationals. Arbitrators, more than the courts of law, tend to seek equitable results rather than results which arc strictly legal. Arbitration can operate to lessen the rigours of the applicable law and correct the disadvantage borne by the party for whom the applicable law is foreign.

(iv) International Recognition

In several countries, for example in Canada, it may be easier to obtain court enforcement of a foreign arbitral award than enforcement of a foreign judgment. This advantage experienced by foreign arbitral awards is due largely to the New York Convention which deals specifically with the recognition and enforcement of foreign arbitral awards and lo which all three NAFTA countries are party. By contrast, there is no multilateral agreement regarding the recognition and enforcement of foreign

judgments between the three signatories to the NAFTA nor any international convention regarding foreign judgments with a range of signatories comparable to that of the New York Convention. This is evidence that Stat.es in general, and the three NAFTA signatories in particular, are more reticent in the face of foreign judicial systems, including those of their immediate neighbours, than they are towards arbitration. This confidence in arbitration is confirmed in the urge to arbitra1c expressed in Article 2022 of the NAFTA.

Statistics

The Secretariat of the ICC International Court of Arbitration has collected statistics relating Lo ICC arbitrations over the last ten years involving parties originating from the three NAFTA countries.¹ These statistics are significant given the fact that the ICC is the most prominent internationally recognised organisation administering international arbitration.

The following table shows the distribution of ICC arbitration for the three NAFTA members.

The figures published by the ICC in May of this year² show that North America, even excluding Mexico, constituted the second largest source of arbitration under the ICC between 1983 and 1992: during those years, North America accounted on a yearly basis for between 10.5% and 15.3% of total ICC arbitrations. second 10 Western Europe which, during the same period. represented on a yearly basis between 52.5% and 63.8% of total ICC arbitrations. However, these figures may be misleading and it should not be concluded that international commercial arbitration is well developed within the NAFTA area.

Parties to ICC: Arbitrations Originating from the U.S.A., Mexico, And Canada (1983-1992) *

The following two tables show the country of origin of the party opposing a party originating from one of the NAFTA countries in ICC arbitrations for the same period:

Origin of Opponents of Parties from the U.S.A., Canada, or Mexico In ICC Arbitrations (1983-1992)

It is clear from the two tables above that parties originating from the three NAFTA countries are, in fact. rarely involved in ICC arbitrations in matters involving another party from one of the NAFTA countries. These statistics show that parties from the NAFTA countries are usually involved in an ICC arbitration when the opposing party is a Western European party.

The statistics above illustrate the timeliness of the will expressed in Article 2022, paragraph 1, of the N AFTA. International commercial arbitration is not yet established in the countries party to the NAFTA, and encouragement is therefore required for its development. Returning to the remarks made above concerning the advantages of arbitration, the situation under the NAFTA regime may be summarised as follows:

1. The United States of America is the world's strongest economic power and its power is magnified within the regional context of North America. This economic domination necessarily translates into domination in terms of both language and commercial law and practice. Arbitration is one of the sole methods available to corporations as a means of keeping American business domination from being a total one. Arbitration enables proceedings in several languages and can act to lessen the effect of the choice of law. A Mexican or Canadian corporation will be much less disadvantaged before a neutral arbitrator then it would be before an American court.
2. Two legal systems are found in North America: common law (the United States of America and anglophone Canada) and civil or roman law (Mexico and Quebec). In addition, the legal prac1tices of each of the three countries differ greatly. The fact that the United States of America and Canada both form part of the G7 means they have a wealth which can support sophisticated and elaborate legal systems. While Mexico is a dynamic country, it is still a developing country which has had less financial and human resources to devote to its legal system over these last decades. International commercial arbitration is a means by which corporations attempting to settle their disputes can reduce the effects of the different legal systems of the NAFTA countries and control the risk of being disadvantaged by such differences.

The undeniable domination by the United States of America and the diversity separating the members of the NAFTA should alone constitute the driving force behind the development of international commercial arbitration in the NAFTA area.

The drafters of the NAFTA were not. therefore. misguided in giving arbitration a prominent role and asking for the formal commitment of the three signatories to arbitration.

In this article we propose to examine the principal arbitration rules applicable within the territory of the NAFTA (Part I), in order to map the potential direction arbitration might take in this pan of the world (Part II).

This examination will be restricted to the rules applicable lo disputes which arise between private parties. We will not consider dispute between member countries of the NAPTA, or between a party and an investor. Considering that international commercial arbitration remains largely a European phenomenon, a fact supported by the statistics presented above. We will examine these questions regarding arbitration in the NAFTA region against the practice of arbitration in Western Europe. Such an examination is all the more warranted by the fact that the signatories to the NAFTA are driven by the same motivation to create a common economic market as were the founders of the European Economic Community.

Part I: Principal Arbitration Legislation in the NAFTA Countries

The Statement of principle in paragraph l of Article 2022 of the NAFTA is complemented by paragraphs 2 and 3 of the same article which state as follows:

"(...)

2. To this end, each Party shall provide appropriate procedures to ensure observance of agreements to arbitrate and for the recognition and enforcement of arbitral awards in such disputes.

3. A Party shall be deemed to be in compliance with paragraph 2 (if it is a party to and is in compliance with the 1958 U11ired Nations Convention on the Recognition anti Enforcement of Foreign Arbitral Awards or the 1975 Inter-American Convention on lnternational Commercial Arbitration.

All three countries party to the NAFTA are party to the New York Convention,³ however only Mexico and the United States of America are party to the 1975 Inter-American Convention on International Commercial Arbitration ("Panama Convention"). Within each of the three countries, legislation pertaining to international commercial arbitration has been adopted.

We will examine in Part I to what extent each of the parties to the NAFTA complies with paragraphs 2 and 3 of Article 2022.

I - International Conventions

The legal structure of each of the three NAFTA countries has the New York Convention as a common point. to which each country is a party. The Panama Convention is itself largely modelled on the New York Convention. Attention should also be drawn to the Montevideo Convention.

A. The New York Convention

There are today approximately 90 countries having ratified the New York Convention, often with reservations and with modifications in order to conform with national Jaws and policies. Consequently, there are variations in the application of the New York Convention particular to each country.

The New York Convention requires each member-State to treat foreign arbitral awards in a fashion which is no less favourable than its treatment of domestic arbitral awards.⁴ The New York Convention provides for seven defenses which may justify the refusal of recognition and enforcement of a foreign arbitral award:⁵

1. Incapacity of the parties to the arbitration agreement or invalidity of the agreement itself under the law of the country to which it was subjected or where the award was made;
2. The party against whom the award was made was not provided with an adequate opportunity to present its case;
3. The award falls outside the scope or the arbitration agreement;
4. Improper or insufficient constitution of the arbitral tribunal;
5. The award is not yet binding on the parties or has been validly set aside or suspended;
6. The subject matter of the dispute is not capable of settlement by arbitration under the law of the country where enforcement is sought;
7. The recognition or enforcement of the award would be contrary to public policy in the country where enforcement is sought.

The New York Convention also requires recognition of arbitration agreements. One of the prerequisites to this recognition is a written arbitration agreement.⁶ which may consist of an arbitral clause in a contract or a separate arbitration agreement signed by the two parties. Under Article 11(2), the requirement for a written agreement may be satisfied by an exchange of letters or telegrams. No mandatory form is required.

The Convention provides a summary procedure in order to establish the validity of the award, requiring simply that authenticated copies of the arbitral agreement and award be joined to the request for recognition and enforcement.

B. The Panama Convention

Paragraph 3 of Article 2022 of the NAFTA stales that a party shall be in compliance with paragraph 2 of Article 2022 if "it is a party to and is in compliance with" the New York or Panama Conventions. As was mentioned above, only the United States of America and Mexico are party to the Panama Convention.⁷

The Panama Convention is modelled on the New York Convention and consequently. adherence by Canada is not essential to Canada's compliance with the spirit and intent of the NAFTA. At the same time, however, Canada's adhesion to the Panama Convention would extend the guarantees included in it to Canada's relations with Latin American countries who are not party to the New York Convention (for example Brazil, Venezuela, Honduras, El Salvador and Paraguay). Article 2204 of the NAFTA provides for the possibility of adhesion to the agreement by other Latin American countries. Finally, it should be noted that the Panama Convention has had a particularly beneficial effect on the trade relations between member Latin American countries who have traditionally been reluctant to relinquish local sovereignty.

C. The Montevideo Convention

The 1979 Montevideo Convention on Extraterritorial Validity of foreign judgements and Arbitral Awards should also be noted. This convention was ratified by Mexico in 1987.

It is intended as an accessory and complementing instrument 10 the Panama Convention since the latter one is silent on some matters foreseen by its guiding model, the New York Convention, for example, the conditions which must be met when seeking extraterritorial award enforcement.

The Montevideo Convention may be applied no! only in trade relations between Mexico and other Latin American countries; it is also open to signature by any other nation engaging in trade with Latin America. The United States and Canada could therefore accede to it, further extending their trade guarantees with Latin America.

II. National Legislation

A. The United States of America

Despite the fact that the United States Supreme Court has. since 1855, emphasized that arbitration should be encouraged by the courts.⁸ this has not always been the case.

Obstacles to national and international arbitration remain because of the federal structure of the United States of America (see Part II.I below).

Nevertheless, it is equally true that arbitration is already widely practised in the United States or America with regard to trade matters at the national and international level and that the practice of arbitration continues to increase. The development of laws governing arbitration, both at the State and federal level (laws which may at times be described as progressive in contrast to existing international instruments) is evidence of that practice.

1. Arbitration Legislation

The United States of America is organised under a federal system of government where the law generally applicable is based on the Common Law. Federal and State laws are consequently derived from two sources: legislation and judicial decisions.

The United States of America incorporated the provisions of the New York Convention into its national law in 1970 by amending chapter 2 (sections 201 to 208) of the 1925 Federal Arbitration Act ("FAA").⁹ The amendment included the text of the New York Convention itself. Application of the New York Convention, however, is restricted to commercial matters involving parties from other countries who are members to the New York Convention.

As was mentioned earlier, the United States of America is signatory to and has ratified the Panama Convention. Chapter 3 of the FAA was modified in order to incorporate this text. The 1965 Convention on the Settlement of Investment Disputes Between States and

Nationals of Other States of the ICSID¹⁰ has also been ratified by the United States of America.

The United States of America have also signed several bilateral agreements (Treaties of Friendship, Commerce, and Navigation). Some of which provide for private arbitration and enforcement of foreign arbitral awards.

Only federal legislation will be examined below since it is that which governs issues concerning international arbitration.¹¹ The FAA applies to arbitrations concerning international and maritime transac1ions as well as transactions between parties from different States of the United States of America. The main elements to be gleaned from American arbitration legislation are the following:

(a) Arbitration Clauses and Submissions to Arbitration

In contrast to the uncertainty which has loomed in several Canadian provinces. the American federal position clearly allows parties to a contract to insert an arbitral clause regarding future disputes: clauses providing for future disputes are valid.¹² There are no restrictions on who may agree to arbitration or to an arbitration clause.

It is important to note that parties to a contract should not neglect the opportunity to carefully draft an arbitration clause as the FAA permits the parties lo accord broad powers to the arbitrators. Among these powers is that which enables the arbitrators to cover any oversights of the parties (the power to fill gaps in contracts¹³) where the parties expressly confer this power to the arbitrators. The oversights of the parties may relate to particular clauses of the contract to which the parties were unable to agree or they may be the oversights which arise in a contract over the long term.

Within the domestic arena, a tendency of American lawyers when faced with an arbitral clause is to take the matter away from the arbitrators by challenging the validity of the clause before the courts. However, this obstacle should be rarely met with as federal law confers upon the arbitrators the power to determine the validity of an arbitral clause. Federal law also adopts the principle which is widely accepted today regarding the severability of an arbitral clause.

The principle of the severability of an arbitration agreement was established by the United States of America Supreme Court's decision in Prima Paint v. Flood Conklin¹⁴ which found that arbitral clauses having a wide scope of application (''broad arbitration clauses") were separable, such as the arbitration clause recommended by the American Arbitration Association. The arbitration agreement proposed by the International Chamber of Commerce may equally be considered as a "broad arbitration clause".

A debate arose over the question of whether or not a party may obtain a stay of litigation pending the completion of arbitration. The controversy is complicated by the fact that Chapter 2 of the FAA implementing the Convention of New York does not expressly grant the courts authority to stay court proceedings during arbitration while Chapter 1 of the FAA relative to domestic agreements does. This ambiguity is further compounded by the fact that the FAA makes Chapter 1 applicable to Chapter 2-type matters to the extent that there is no conflict.

The related question of whether a party may obtain a stay of a competing court litigation has received an affirmative response from the Supreme Court which recognised the right of a party to compel another party to intern arbitration by virtue of the FAA.¹⁵ It would be reasonable to conclude that the same reasoning would be applied to the issue regarding the ability to obtain a stay of litigation pending the completion or arbitration.

(b) Arbitrators

The FAA contains no provisions regarding the qualifications or arbitrators. The only barrier (which is practically universal in nature) to the appointment of an arbitrator is the lack of impartiality. This requirement may provide a valid ground for setting aside an arbitral award.¹⁶

For the United States or America Supreme Court, the standard of impartiality includes any appearance or partiality as well as an actual partiality.¹⁷ Since the FAA does not include any provisions for challenging or removing arbitrators, it is difficult if not impossible, lo obtain judicial review of an arbitrator's appointment before or during an ad hoc arbitral proceeding. It is generally necessary to await the enforcement phase of the award. On the other hand, in the case of arbitrations effected under the supervision of an arbitral institution, the institution may be entitled to take action and replace an arbitrator upon the request of a party alleging prejudice, if the arbitration institution's rules so permit. The Rules of Arbitration of the ICC, for instance. provide for such an event.

Similar to a number of arbitration rules, the FAA provides for possible deficiencies in an arbitral clause:

• a sole arbitrator shall be nominated in the event of silence of the parties regarding the number of arbitrators lo settle their conflict;
• nomination of the arbitrators by the courts if the parties have not provided a method for nominating the arbitrators or if one of the parties refuses to nominate an arbitrator.

(c) Applicable Law

An arbitrator may have to apply two systems of law: procedural and substantive. with the substantive law being the law of the contract as determined either by the parties or the arbitrators.

The FAA does not contain provisions addressing the issue or the law applicable to an arbitral dispute as opposed to, for example, French Law.¹⁸

Consequently, where the contract is silent, the arbitrators shall determine the applicable procedural law (usually that of the place of the arbitration) as well as the applicable substantive law. The arbitrators shall determine the applicable law either on the basis of conflict of law principles in force at the place of arbitration or by selecting the applicable law. The arbitrators' freedom to choose the applicable law is restricted only by the necessity to render an award capable of enforcement. The arbitrators must, therefore. take into account the recognition and enforcement practice of any country where the award is likely to be enforced.

Since American arbitral awards are rarely accompanied by the reasons of the arbitrator, it is impossible to indicate here the basis generally used by arbitrators to determine the applicable substantive law for an arbitration effected in an American jurisdiction.

(d) Interim Measures of Protection

i) Despite the absence of any express provision in the FAA, arbitrators have the power to order interim measures of protection.

ln practice, however, arbitrators acting under the authority of American law rarely make interim awards. This is due largely to the fact that most American courts adhere to the principle that once an arbitral award is rendered, the arbitrator has no further power in the matter [the arbitrator becomes functus officio].

Arbitrators must ensure, therefore. that tile issuance or an interim arbitral award will not result in their losing jurisdiction over the dispute and prohibit them from making a final decision on the actual merits of the matter. A carefully drafted arbitral clause may take into account this policy and confirm the arbitrators' power lo make interim awards and other protection measures.

ii) The power of the federal courts to order protection measures at the request of a party in an arbitration matter has been widely debated and the United States of America Supreme Court has not yet resolved the matter.

It is difficult to extract any guiding principle from federal-level case law as several courts have granted attachment while other courts have refused to do so on the basis that they were no longer competent once the parties had submitted their dispute to arbitration.

The jurisprudence at the State level is equally ambiguous. However, in 1982, the Court of Appeal¹⁹ of the Stale of New York²⁰ refused to grant an attachment on the basis that the New York Convention prohibited the courts from acting at all except to order arbitration.²¹

(e) Arbitral Awards

Under American procedural law, arbitral awards are not required to be accompanied by reasons. According to Howard M. Holtzman,²² the American practice is to render a conclusion without reasons except if the parties have otherwise agreed in the arbitral clause or agreement.

Regarding the enforcement of an arbitral award, the FAA provides that either party may apply, within one year of the date the award was made, to a federal court to affirm the award in order to make it executory. The competent federal court is that of the place of arbitration. The court must affirm the award except if the award has been set aside.

(f) Means of Recourse

The enforcement of an award may be refused only in the circumstances provided by federal and State statutes. Generally, an arbitral award may be set aside on the following basis:

1. the award was obtained by fraud or corruption;
2. partiality or the arbitrator;
3. refusal by the arbitrators to consider pertinent evidence or any other action prejudicial to the rights of a party;
4. arbitrators exceeded their powers;
5. manifest disregard of the law.

2. Recognition and Enforcement of Foreign Arbitral Awards in the United States of America

The enforcement of foreign arbitral awards is generally governed by international treaties to which the United States of America is party. American courts tend to promote. in this regard, the broad application of the New York Convention. Even where no international or bilateral agreement is applicable, the courts tend to support international arbitration.

This positive judicial attitude which was strengthened following the 1974 Supreme Court decision in Scherk²³ has resulted in very few refusals to enforce foreign arbitral awards.

The request to enforce an international arbitral award cannot, in fact, be refused unless one of the seven grounds for refusal set out in Article V of the New York Convention exists. The party seeking to have the execution of the award rejected must prove the existence of one of these grounds.

Requests for the enforcement of an arbitral award governed by the New York Convention must be made to the federal courts²⁴ regardless of the amount involved. within three years of the pronouncement of the award.²⁵ The courts competent to hear a request for execution are those which, in the case or the silence of an arbitral clause. would have been competent to decide on the merits of the dispute or those courts situated in the district which served as the place of arbitration as selected under the arbitration agreement.

The request for enforcement must be made in the form of a motion filed with an affidavit, in conformance with Title 9 of the United States of America Code (§6). Requests for enforcement arc dealt with under summary procedure.

The application of the provisions of the New York Convention has not always been clear and the American courts have met with a few difficulties in its interpretation.

For example, the means of determining the existence of an "agreement in writing" by which the parties agreed to submit their dispute to arbitration, proved to pose a problem to the courts who had been reluctant to apply criteria established in federal or State law. The issue was finally settled by the United States of America Supreme Court in Filanto, S.p.A. v. Chilewhich International Corp.²⁶which applied the federal law of contracts. The Federal law of contracts is the embodiment of the United Nations Convention on Contracts for the International Sale of Goods, in force in the United States of America since January 1st, 1988. The court rejected, in this way, the application of the Uniform Commercial Code.

On the other hand, the jurisprudence has given a wide meaning to the expression "foreign awards" in order to broaden the scope of application of the New York Convention.

In this regard. it is clear that American law considers an arbitration to be beyond the scope of domestic arbitration, even in cases where only American parties are involved and the arbitration itself is heard in the United States of America, where the arbitration (i) involves goods situated outside the States, (ii) is capable of enforcement outside the States, or (iii) has some reasonable connection to some place outside the State.²⁷

The concept of public policy is used in an equally permissive fashion as the execution of an arbitral award shall be refused only if it violates "the forum States most basic notions of morality and justice.²⁸

3. Arbitration Institutions

The principal arbitration institution in the United States of America is the American Arbitration Association ("AAA"), founded in 1926. Other arbitration institutions in the States specialise in the resolution or disputes in particular fields. The AAA is the sole organisation whose activity is not limited in respect of the nature of a dispute or its location. The list of AAA arbitrators amounts to over 60,000 people of whom 3.000 form part of a group concentrating in international disputes. The AAA has its headquarters in New York City.

B. Canada

Canada is a federal country consisting of ten provinces and two federal territories. With the exception of Quebec, where civil law prevails in private matters. Canada is a common law jurisdiction.

In contrast to the United States of America, where arbitrations between residents of two different federated States as well as international arbitrations are governed federally by the FAA, commercial arbitration in Canada, including international commercial arbitration, falls under provincial competence.

Under the Canadian Constitution, the fed1eral and provincial governments enjoy a shared competence with respect to the regulation of commercial matters. The federal government has the power to legislate in maritime and transport matters as well as matters of trade and commerce. Federal responsibility in the area of trade and commerce, however, is defined more narrowly in Canada than in the United States of America. The provinces are responsible for property and civil matters, an area which has been given a wide interpretation under the Canadian Constitution.

Arbitration is not exclusive to either level of government: the federal and provincial governments are both competent to legislate in relation to arbitration within the confines of their respective constitutional jurisdictions. The practical consequence of this division on the basis of constitutional powers has meant, however, that international commercial arbitration falls principally under provincial domain.

Historically. Canada has shown itself to be poorly dispose to the development of arbitration. The differences between the common law provinces and Quebec may explain the infrequent resort to arbitration in commercial matters.²⁹ However, a more obvious explanation is the fact that Canada did not become a party to the New York Convention until 1986 and that, consequently, there was no federal arbitration legislation while the provincial provisions remained outdated. Further, the fact that under the common law systems a question of law raised in an arbitration may be referred to the courts could only have had a discouraging effect on the development of arbitration. The adoption nationally of the New York Convention should promise increased resort to arbi1ration methods.

The ratification of a treaty by the federal government does not, in itself, mean implementation of the treaty in Canada. In general, any treaty to which Canada is a party only becomes part of the domestic law once it has been adopted by legislative statute. Therefore, in order to implement properly those international treaties which affect provincial responsibility, both the federal legislature and each of the provincial legislatures must adopt the text.

The New York Convention has been adopted throughout Canada, federally and provincially, since 1986.³⁰ The federal and provincial legislatures, with the exception of Quebec. have restricted the application of the Convention to commercial matters. or more precisely, to disputes arising from legal relations whether contractual or not and having a commercial character under national law. Such a restriction will likely entail disputes regarding the definition of a legal relation commercial in nature.

The Canadian federal and provincial governments have not invoked the reservation regarding reciprocity allowed under the New York Convention, by which a contracting State may limit the application of the Convention to those arbitral awards made in another contracting State. In other words, Canada will recognise and enforce awards emanating even from countries which are not party to the New York Convention.

1. Arbitration Legislation

(a) The Commercial Arbitration Act (May 7, 1986)

The Commercial Arbitration Act is the only federal statute regarding commercial arbitration. Its scope is limited Lo the following matters: (1) where at least one of the parties involved is either the federal government, a federal body, a federal departmental corporation, or a Crown Corporation,³¹ or (2) where the arbitration involves maritime or admiralty issues.

Consequently, the Act does not affect a party unless they have contracted with one of the bodies listed above or the matter falls within one of the areas specifically addressed by the Act.

(b) UNClTRAL Model Law

On June 21, 1985, the United Nations Commission on International Trade Law adopted the Model Law relative to international commercial arbitration. It has been implemented, with certain amendments. by every Canadian province.

Neither the UNCITRAL Model Law nor all of the resulting provincial statutes. will be examined here. Our examination shall be restricted to the salient features of the statutes of two provinces: Quebec, governed by civil law. and British Columbia, governed by common law, both the seat of a commercial arbitration centre.

(c) Quebec

It was not before a decision from the Supreme Court of Canada in 1983³² that the uncertainty regarding the validity of arbitral clauses in Quebec was settled. The question related particularly to whether the parties could by contract (1) submit future disputes to litigation, and (2) provide that the arbitral award be final and binding. Note that the Quebec Code of Civil Procedure has contained provisions relevant to arbitration since 1966.³³

However, the Supreme Court decision resolving the question of validity, as well as a reform of' the arbitration provisions of the Quebec Code of Civil Procedure in force since November 11, 1986,³⁴ have together acted to accelerate the development of domestic and international arbitration in Quebec.

The amendments to the Code of Civil Procedure include provisions regarding the appointment and removal of an arbitrator, the arbitral award, the conditions for the approval or setting aside of an award, and the conditions for the recognition and enforcement of awards made outside Quebec.

• In order to put an end to the controversy concerning the validity of arbitral clauses, the Civil Code of Lower Canada (that is to say, Quebec) was amended to include a definition of an arbitration agreement:³⁵ a written agreement by which the parties agree to submit their present and future disputes for decision by one or more arbitrators to the exclusion of the Courts. Such an agreement must be written; however, an exchange of documents attesting to the existence of an agreement is sufficient to contract to arbitration.
• The Quebec Code of Civil Procedure adopted the principle of the severability of an arbitral clause: the invalidity of a contract does not automatically entail the invalidity of the arbitral clause contained within.
• The Code also enables parties who have agreed to submit their dispute to arbitration, to apply to the courts for interim measures or protection before or during an arbitration proceeding.
• Under Article 944.10 of the Code of Civil Procedure, arbitrators shall settle a dispute in conformance with those rules of law they deem appropriate. In every case, the arbitrators shall consider the terms of the contract and the relevant trade usages. This provision resembles Article 1496 of the French New Code of Civil Procedure.³⁶ Every arbitral award is final and binding upon the parties.
• Foreign arbitral awards and those made in another Canadian province will be recognised and enforced except in the following situations:

1. incapacity of the parties to conclude an arbitral clause;
2. invalidity of the arbitral clause;
3. the party against which the award is made was not duly notified of the arbitration or adequately enabled to respond;
4. non-compliance with applicable arbitral procedure;
5. the dispute falls outside the scope of the arbitral clause;
6. the dispute was not arbitrable under the laws of Quebec;
7. the award is contrary to public policy;
8. the award has not become binding or was set aside or suspended in the jurisdiction where it was made.

(d) British Columbia

Unlike Quebec, which amended its Code of Civil Procedure in order to combine the provisions relating to domestic and international arbitration, British Columbia maintained its legislation addressing domestic arbitration and adopted a separate law relating to international commercial arbitration: the International Commercial Arbitration Act ("ICAA"). The ICAA is applicable if the place of arbitration is British Columbia.

The ICAA is modelled on the UNCITRAL Model Law. However, it includes several interesting modifications regarding the conduct of an arbitration, such as the possibility of consolidating different matters.

Under the ICAA an arbitration is international if:³⁷

1. othe parties, at the time of the conclusion of the arbitration agreement, have their place of business in two different States; or
2. othe parties have expressly provided that the subject matter of the arbitration relates to more than one State: or
3. one of the following places is outside the State where the parties have their place of business:
1. the place of arbitration;
2. the place where a substantial portion of the contractual terms must be performed;
3. the place with which the subject mailer of the dispute is most closely related.

The provinces and territories of Canada are considered to be one State for the purpose of these conditions. Consequently, an arbitration between a corporation whose headquarters are in Quebec and one whose headquarters are in British Columbia would not be considered an international arbitration.

The essential provisions of the ICAA are the following:

• The arbitral clause and agreement must be written.
• Whereas the UNCITRAL Model Law provides that where no applicable law has been designated by the parties, the arbitrators shall apply the conflict of law rules they deem appropriate, the ICAA enables the arbitrators to apply, in any case, the law they deem most appropriate to the dispute.
• The ICAA further differs from the UNCITRAL Model Law by providing for the consolidation of arbitration proceedings in the event of multiparty disputes.³⁸

Where the parties to two or more arbitration agreements have agreed in the arbitration agreement to consolidate the proceedings arising out of those agreements, the provincial Supreme Court may, upon request by one of the parties and with the consent of all of the parties:

1. order the consolidation of the arbitration proceedings on the basis which the court considers necessary and just;
2. appoint the arbitral tribunal where the parties cannot agree on the make-up of the arbitral tribunal for the consolidated arbitration;
3. make any other order which the court considers necessary where the parties cannot agree on a matter important to the execution of the consolidated arbitration.

• Under the JCAA, a party to an arbitration may request interim measures of protection from the courts before or during arbitration proceedings.
• As opposed to the Quebec Code of Civil Procedure. the ICAA provides the right to appeal an arbitral award in very limited circumstances.
• The enforcement of an award may be refused on two defenses: arbitral error of fact or law, or where the award has been improperly procured. The latter basis would, for example. be applicable where a party withheld evidence

2. Recognition and Enforcement of Foreign Arbitral Awards in Canada and in the Province or Quebec

The enforcement of foreign arbitral awards in Canada is governed by the legislation of the province of the court bearing the application for enforcement. As mentioned above, Canadian provincial legislation has been amended to incorporate the New York Convention on the recognition and enforcement of foreign arbitral awards.

The necessity of enforcement by the jurisdiction from where the award emanates was eliminated by the New York Convention.

Article 948 of the Quebec Code of Civil Procedure provides that the dispositions regarding the recognition and enforcement of foreign awards may, where appropriate, be interpreted in light of the New York Convention. The provisions of the Quebec Code of Civil Procedure make no distinction between international, interprovincial, or provincial arbitration. Articles 1926.1 to 1926.6 of the Civil Code and Articles 940 to 947.4 of the Code of Civil Procedure implement the UNCITRAL Model Law.

The Quebec Civil Code or Procedure appears to go against the position of the New York Convention and the UNCITRAL Model Law by requiring the homologation of foreign awards before they can be executed in Quebec. However, despite the wording of the provision, Quebec practice amounts to that which is provided in the New York Convention as the reasons for rejecting an application to enforce a foreign award are the same as those contained in the New York Convention.

3. Arbitration Institutions

Institutional arbitration has developed in Canada under the aegis of local chambers of commerce. These local chambers of commerce may be affiliated with the Canadian Chamber of Commerce which is itself associated on the international level with the American Arbitration Association. The Canadian Chamber of Commerce and the American Arbitration Association together form the Canadian-American Arbitration Commission which has developed its own rules or arbitration.

Among the arbitration centres existing in Canada, of significance are the British Columbia International Commercial Arbitration Centre in Vancouver and the Centre d'Arbitrage Commercial National et International du Quebec in Quebec, both founded in 1986.

C. Mexico³⁹

Mexico is a Federal Republic comprised of 31 States each with its own system of law in addition to that of the Federal District and Territories. Under the Mexican Federal Constitution, commercial law is the exclusive competence of the Congress, Commercial arbitration is, therefore, governed by federal legislature.

Article 133 or the Mexican Constitution provides for the automatic incorporation into Mexican Law of the treaties to which Mexico is party, having immediate force nationwide.

1. Arbitration Legislation

As mentioned earlier. Mexico is party to both the New York and Panama conventions and has not, in this context, declared any reservations qualifying its agreement to these two instruments. As regards the Montevideo convention to which it is the sole adhering state among the parties to NAFTA, it has declared a reservation limiting the scope of application or said convention to awards of civil and (or) commercial nature, i.e. those affecting property. with the express exclusion of any matters of labor law. The reasoning behind this reservation, is to conform with Constitutional Law.

Beside these international agreements, the rules governing international arbitration in Mexico are to be found chiefly in the 1993 Decree amending the Mexican Code of Commerce.⁴⁰

In fact, the 1890 Code or Commerce had been amended in 1989 with the adoption or an entire section concerning arbitration.

Alexander C. Hoagland considered that the first changes introduced in 1989 to the Mexican Code of Commerce enabled Mexico access to international trade and foreign investments.⁴¹

Although this is correct, the Mexican Code of Commerce as amended in 1989. though representing a major breakthrough in Mexican regulation on arbitration, nevertheless still posed severe disadvantages to arbitration in Mexico.

Even though the 1989 amendments proved to be an initial success, through the introduction of new elements such as permitting the parties to submit their disputes to international arbitration, as well as providing them with the faculty to choose the applicable procedural rules and substantive law, its most noticeable weaknesses resided in the following:

1. the need to use the Spanish language when an arbitration took place in Mexico. Although this was not to the prejudice of the use of another language, it meant that an arbitration agreed upon in a different language than Spanish could not take place unless the corresponding Spanish translations were added thereto, with a significant impact on the duration and costs of an arbitration proceeding;
2. arbitrators didn't have the power to order interim measures of protection, having to address the courts for such an order, particularly if the property of the respondent risked an imminent peril;
3. the parties to a dispute could not challenge an arbitrator, if he was mutually agreed upon;
4. in the case of resignation of an arbitrator, if the substitute arbitrator in his turn resigned, the arbitration proceeding was put to an end.

The 1993 Decree incorporated into Title IV or the Code of Commerce heals all these deficiencies or the former arbitration law, and is based on the UNCITRAL Model Law on International Commercial Arbitration.⁴²

This represents a major breakthrough for arbitration in Mexico, and constitutes a necessary step eminently oriented towards NAFTA and is part of the actual Mexican trend to openness in international trade.

The definition of international commercial arbitration. which was lacking in the 1989 amendments, is inspired by that of the UNCITRAL Model Law, mainly establishing that an arbitration is international when either the parties have their places of business in different States at the time arbitration is agreed upon, or else, when the place of arbitration or the place in which the substantial part of the commercial obligations is to be performed is situated outside the country in which either party has its place of business.

Under the present regulation, and in complete contrast to the situation prevailing before, the use of the Spanish language is no longer mandatory for arbitrations taking place in Mexico. Further, the arbitrators can now order interim measures.⁴³

Concerning the challenge of arbitrators, the parties have no longer the obligation to refer this matter to local courts as they may now freely determine the challenge procedures.⁴⁴This means that they are free to refer to procedures set out in institutional arbitration rules.

The l993 amendments to the Code of Commerce are very close to its inspiring UNCITRAL Model Law on International Commercial Arbitration, but differ in some aspects worth mentioning, namely:

1. It regulates more precisely periods of Lime for notifications and communications.⁴⁵
2. Whereas article 10, or the UNCJTRAL Model Law, specifies that failing a determination by the parties on the number of arbitrators, this number shall be three, the Mexican Code of Commerce establishes the opposite, i.e. a sole arbitrator instead of three⁴⁶ probably due to arbitration cost considerations.
3. In the event that the parties do not select the applicable law, the arbitrators are not bound to apply conflict of law rules. ln determining the applicable law, the arbitrators are invited to consider the nature of the dispute and its connecting factors.
4. The Mexican Code or Commerce presents a definition on arbitration costs, which includes administrative expenses for arbitration institutions, as well as for expertise.⁴⁷

2. Recognition and Enforcement of Foreign Arbitral Awards

Recognition and enforcement of awards (articles 1461- 1463 of the Code of Commerce) provisions are substantially equivalent to articles 35 and 36 of the UNCITRAL Model Law. In addition to this, the Code of Commerce makes reference to art. 360 of the Federal Code of Civil Procedure which sets a timetable for the municipal court to pronounce itself on the issue.

The courts competent to grant the enforcement of an arbitral award are those mentioned in article 1422 of the Code of Commerce, i.e. the first instance court whether federal or local.

The formal requirements for recognition and enforcement of an arbitral award are as follows: the award must be translated into Spanish and duly "legalized". by the Mexican consul exercising his or her functions in the place closest to that where the award was made. The signature of the consul must subsequently be authenticated by the Mexican Department of Foreign Affairs, attesting to the genuiness of the consul's signature and the fact that the consul was in possession or full powers at the time of the legalization of the document.

Recognition and enforcement of an arbitral award may be refused at the request of a party, if one of the parties did not have the capacity to agree to arbitration, if a party was unable to present its case, if the award deals ⁴⁸with a dispute outside the scope of the submission to arbitration, if the tribunal was irregularly constituted, or if the award is not yet binding on the parties. Further recognition and enforcement may be refused if the subject matter is not arbitrable, or if the award is against public policy.⁴⁸

An example of violation of public order is posed by certain sectors of foreign investment which come under the exclusive domain of Mexican law, and are further not subject to dispute settlement through arbitration. Such areas are, in particular, the oil, nuclear, and petrochemicals sectors.

3. Arbitral Institutions

Two institutions have been established in Mexico: the Camara Internacional de Comercio Capitulo Mexicano. A.C. and the Camara Nacional de Comercio de Mexico (CANACO). CANACO, together with the Mexican Academy of International Commercial Arbitration (ADACI) and the Mexican Bar Association, has been responsible for numerous efforts directed at promoting arbitration. CANACO acts as national representative to the Inter-American Commercial Arbitration Commission (1933).⁴⁹

Part II: The Emergence of a New Zone of Arbitration Current Difficulties and Future Trends

The first pan of this article canvassed the current legal environment as it concerns arbitration within the NAFTA area. We will return now to Article 2022 of the NAFTA which, itself, is turned towards the future.

The encouragement to use arbitration contained in Article 2022 of the NAFTA may appear trite to European counsel as arbitration in Europe has been embraced strongly, particularly within the European Community. Latin American countries, such as Mexico, have been very reluctant to use arbitration and Canada, itself, did not appear too receptive to international arbitration either. The examination of the legal structures which has preceded explained the recent nature of the development of both domestic and international arbitration.

Article 2022 of the NAFTA is significant since it expresses the common desire of the three member countries to make North America a jurisdiction favourable to arbitration within which the Advisory Committee on Private Commercial Disputes (as contemplated by paragraph 4 of Article 2022) may attempt to harmonise the various rules and possibly produce an instrument of comment principles. Paragraph 4 provides as follows:

"4. The Commission shall establish an Advisory Committee on Private Commercial Disputes comprising persons with expertise or experience in the resolution of private international commercial disputes. The Committee shall report and provide recommandations to the Commission on general issues referred to it by the Commission respecting the availability, use and effectiveness of arbitration and other procedures for the resolution of such disputes in the free trade area."

Both in terms of applicable procedural and substantive law, arbitration in North America is confronted with two major obstacles.

The first difficulty concerns domestic and international arbitration, and affects corporations with headquarters in North America as much as foreign corporations carrying on business in North America: the difficulty being the federal nature of each of the three member States to the NAFTA (I).

The second difficulty concerns mostly European corporations involved in North America who, without knowing of the North American legal environment, make contracts based on the arbitration principles and practices which they apply regularly in Europe. When European arbitration rules are compared with those in force within the NAFTA jurisdiction (II), it seems relevant that two of the three NAFTA member States have common law systems: the common law traditionally rejected principles

relating to arbitration and. particularly, the idea that arbitration is outside the control of ordinary courts.

The potential impact of Article 2022 of the NAFTA should be examined in the light of these obstacles. The establishment of a set of common principles applied throughout the continent would reduce the problems inherent in divergent legal systems and, consequently, encourage the development of arbitration.

I - Federalism

Corporations are met with the same type or obstacles within a federal structure as they are in an international context. Within a federal system, each federated State is quasi-sovereign, adopting its own laws and having its own courts. Relations between federated States, particularly commercial relations, run into conflict of law and procedure issues when trying to enforce a judgment from one federated State in another, even when there are federal harmonisation rules.

Knowledge of the types of obstacles which arise when arbitrating within a federal structure can be used by counsel and negotiators in order to better select applicable procedural and substantive law.

A. The Interest in Arbitration

Arbitration may prove to be the more advantageous method for dispute settlement in a federal entity as arbitration methods enable parties to avoid those State or federal jurisdictions which are less hospitable to their interests.

This point may be illustrated by American federal and State jurisprudence regarding the interpretation of forum selection clauses. The validity and interpretation of forum selection clauses frequently made issue or before the American courts and the findings vary from one court to another and from one State to another.

The result of all this, according to Gary D. Sesser,⁵⁰ is that the jurisprudence interpreting forum selection clauses requires drafters of international contracts to have a sophisticated understanding of the American legal system und of the law of each of the 51 States.

The US Supreme Court, in The Bremen case,⁵¹ declared that a forum selection clause was valid in principle and should be enforced, except if the party opposed to its enforcement demonstrated that the clause was "unreasonable" in light of the circumstances of the case. This policy was applicable to both international and national agreements. However, the federal and State courts have since reopened the issue by adding the qualification that the forum selected by the parties is not intended to be exclusive; in other words, the view that has developed since The Bremen is that the parties may have agreed to a specific tribunal for the settlement of their disputes but did not necessarily intend to exclude the jurisdiction of another more appropriate court. This was the finding for example, of the Eleventh Circuit Court in Citro Florida Inc. v. Citrovale SA.⁵²

A forum selection clause which is not sufficiently explicit, therefore, may be used to the advantage of a party trying, to alter it in the American courts.

In international affairs, many contracts in English are in fact drafted by lawyers and negotiators for whom English is not their maternal language; the fine interpretative distinctions currently employed by the American courts may escape them. In international agreements governed by foreign law, legal certainty is undermined where the American courts raise the issue of whether, under the law selected by the parties, the forum selection clause is exclusive. Such an issue also suggests the need for the parties to prove the contents or the foreign law.

At present, the US Supreme Court adheres to the doctrine of forum non conveniens⁵³ for both domestic and international agreements. The forum selection clause drafted by the parties may, therefore, be discounted if the court feels another jurisdiction would be more appropriate [for example, due to location of witnesses and evidence]. Several federal circuit courts of appeals have been anxious to employ the doctrine in cases where the forum selection clause designated a court outside the United States of America.⁵⁴

The way in which this doctrine is used can only assist the development of arbitration and encourage parties to an international contract, having headquarters within or outside the NAFTA jurisdiction, to insert an arbitration clause. All three of the NAFTA signatories are signatory also to the New York Convention. Their courts must therefore give full effect to arbitration clauses, without interpreting them as they are able to in the case of forum selection clauses.

For matters taking place within the NAFTA area or with a party having activities there, resort to arbitration enables the avoidance of the difficulties inherent in a federal entity. The establishment or this assertion will be made while indicating the obstacles to avoid in order that the arbitration may be executed smoothly (B), using procedural rules as an example (C), and while canvassing possible difficulties of execution (D).

B. Avoiding the problems inherent in the Federal structure of each of the NAFTA States

The examples used to illustrate the obstacles within a federal structure may seem extreme. However, as they exist, it is necessary to point them out in order that practitioners may consider them at the time of negotiating an agreement.

1. The most flagrant example of possible confusion within a federal structure as to the choice of law expressed by the parties is the 1989 US Supreme Court decision in Volt,⁵⁵where the will expressed by the parties in the arbitral and choice of law clauses in their contract were foiled. The decision relates to inter-State trade but the reasoning used may apply equally to international agreements.

The choice of law clause provided that the contract be governed by the law of the location of the work site of the work contracted for.⁵⁶

The work site was in California. Californian law was therefore applicable. A dispute arose regarding the execution of the contract and one of the parties, while refusing to submit to arbitration, applied to the California courts for a stay of proceedings in accordance with a California law which allowed for stays pending resolution of a related matter between one of the parties and a third party.

The Superior Court and the California. Court of Appeal found that the designation by the parties of Californian law included the designation of California's arbitral procedure law which enabled the Californian courts to order an arbitral tribunal to stay a decision. The US Supreme Court confirmed the decisions of the two lower courts finding that, while the matter involved inter-State trade and therefore the FAA should apply, the choice of law clause in the contract allowed the FAA to be set aside in favour of the procedural law of the State of California. Under this type of reasoning, a French corporation concluding a contract governed by California law with arbitral proceedings in London could find itself summoned before the Californian courts against the intent and purpose of the arbitral clause. Such jurisprudence should cause non-American parties to think about protecting themselves against legal uncertainty either by designating all the law of a non-federal country or by drafting very clearly the applicable law clause.

Joseph D. Becker⁵⁷ recommends adding to the choice of law clause, a clause dealing specifically with procedural law:

"... provided that any dispute, controversy, question, or issue arising out of or relating directly or indirectly to paragraph [ ] (Arbitration) of this Agreement shall be govern exclusively by the United States of America Arbitration Act as then in force. "

The lesson to be had from this jurisprudence is that, as far as the United States of America is concern a choice of law clause or an arbitration clause must designate the applicable procedural law.

2. The choice of law clause in an international contract should provide for the substantive law in order to avoid any ambiguity. Each of the three NAFTA States permit such a choice. The parties to an agreement should not leave the determination of the applicable law to the arbitrators.

The latitude with which the arbitrators may choose the applicable substantive law may vary depending upon the applicable procedural law or the place of arbitration. In Canada, the majority of provinces have implemented the UNCITRAL Model Law which provides for the designation of the law by the arbitrators in accordance with applicable conflict of law rules. However, a few provinces have set aside this rule. As we have seen above, the British Columbia International Commercial Arbitration Act⁵⁸ provides that the arbitral tribunal shall apply the law which it deems appropriate under the circumstances of the dispute. The international arbitration laws of Ontario and Saskatchewan include similar provisions. Finally, the Quebec Code of Civil Procedure⁵⁹ grants the widest powers to arbitrators: they shall choose the law they deem appropriate. In each case, the arbitrator shall take into account the provisions of the contract and relevant trade usages.

If precautions are taken to elaborate express terms, arbitration contracts and clauses can provide the most advantageous use of a federal­style structure. As a federal entity, however, Mexico poses the least problems as all commercial matters are governed exclusively by the federal law.

C. Using the Federal Structure

Negotiators of international contracts may best use the federal structure of NAFTA members by designating the law of one of the federated States as the law governing the arbitral procedure, or by choosing the place of arbitration in a State which is receptive to arbitration.

Such a use of federated State laws may prove useful in Canada where international arbitration rules come under provincial competence with each State having adopted its own arbitration legislation. Through choice of procedural law, therefore, parties may provide for several important aspects, namely in terms of their ability to obtain (1) interim measures of protection from the State court, (2) consolidation of arbitration proceedings, and (3) the appointment of an arbitrator by the courts in case of failure by one of the parties.

1. Arbitration law in Ontario provides that a court may appoint an arbitrator if a party has failed to name an arbitrator within seven days of the service of notice.

2. Similarly, although there are no express provisions found in Mexican legislation, the American FAA, the Quebec Code of Civil Procedure and several of the international arbitration statutes of the Canadian common law provinces⁶⁰ provide for the possibility of consolidating arbitrations which concern the same parties or contracts. The British Columbia consolidation rules were examined in Part I, section II-A-4, above.

In general, with the exception of British Columbia. the consolidation rules of the common law provinces provide that upon application of one or more parties to two or more proceedings, the court may order that:

1. the arbitration proceedings be consolidated on terms the court considers just;
2. the arbitration proceedings be heard at the same time or one immediately after another:
3. any of the arbitration proceedings be stayed until after the determination of any other of them.

A procedure for the nomination of a new arbitral tribunal is also provided; failing application of this procedure by the parties, the arbitrators shall be named by the court.

3. Finally, the possibility of requesting interim measures of protection from the courts may prove useful in order to stop a corporation from deliberately becoming insolvent.

As was examined in Section A of Part I above, the possibility of obtaining interim measures of protection in the United States of America is highly disputed, both at the federal and State level. Some courts have granted preservation measures, where others have refused. Consequently, a major factor in whether a party will be granted interim measures of protection or not relates to the place of arbitration or the procedural law chosen.

Similarly, in Quebec, the parties to an arbitration agreement continue to have access to the courts for the purpose of requesting an interim order of protection before or during an arbitration proceeding.

D. Recognition and Enforcement of Foreign Arbitral Awards

The location of an arbitration in one federated State as opposed to another may also have an influence on the recognition and enforcement of the award itself.

Under international public law, a federated State is not considered independent and cannot, therefore, be party to the New York Convention or the Recognition and Enforcement of Foreign Arbitral Awards.

Thus, the law in effect in British Columbia regarding the recognition and enforcement of foreign arbitral awards excludes from its application awards made in other Canadian provinces. The Quebec Code of Civil Procedure, however, applies equally to the recognition and enforcement of awards made elsewhere in Canada as to those made outside Canada.

1. The application of the New York Convention by a court depends on the definition the court gives to the term "foreign award".

There is no criteria selling out the characteristics of an international arbitration in the United States of America compared to France, for example, where Article 1492 of the New Code of Civil Procedure defines an international arbitration as that which "puts in issue international trade interests" [trans]. Rather than the notion or international arbitration, the courts in the United States of America and Canada refer more to the concept or a foreign arbitral award, similar to that which is used in the New York Convention.

Article 202 of the American FAA provides that the New York Convention does not apply to a matter involving two American nationals unless the matter (i) relates to property situated outside the States. (ii) must be executed outside the States, or (iii) has sufficient connection to one or more foreign States.

Article 202 or the FAA therefore gives a wide meaning to the notion of a foreign arbitral award. Laurent A. Niddam⁶¹concludes that as it has been interpreted by the courts, Article 202 resembles the definition of international arbitration found in Article 1492 of the New Code of Civil Procedure as that which "involves interests of international trade'' [trans.].

Both in the United States of America and Canada, it is easier to obtain recognition and enforcement of foreign arbitral award than foreign judgments. As was discussed above, the fact that Canada, the United States of America, and Mexico are each bound to the New York Convention leaves, technically, little freedom to the courts to refuse the enforcement of a foreign arbitral award. The basis for the refusal of a foreign arbitral award by the courts is clearly defined in the New York Convention. However, the enforcement of foreign judgments in Canada, for example, may still be subjected to a review of its merits.

2. The North American tendency to favour the enforcement of foreign arbitral awards may also be illustrated by the interpretation given to Article V-1-(e) of the New York Convention by the District Court for the Southern District of New York⁶²: the court concluded that an arbitral award could only be set aside in the country which served as the forum for the arbitration, or in the country whose procedural law was applied to the arbitration. In this particular matter, the country which served as the forum for the arbitration and the country whose procedural law was applied were both Mexico. Based on Mexican procedural law, the substantive law which applied was that of the State of New York. As a means to block the enforcement of the award in the State of New York, the party against whom the award was made tried to rely on Article V-1-(e) of the New York Convention which provides that recognition and enforcement of an award may be refused if the award has been set aside or suspended by a competent authority in the country in which, or according to the law of which. the award was made. The party argued that "the law of the country according to which the award was made" included the law of the State of New York, being the substantive law which was applied. and that consequently the Stale of New York was competent to set aside the award. The argument, however, was rejected by the court who preferred to enforce the foreign award. Other courts, however, have accepted such an argument.⁶³

3. Another obstacle facing an application for enforcement of an international foreign arbitral award in a federal-style State is the problem of determining which court is competent to recognise the award.

The rule in the United States of America is that foreign arbitral awards fall under the principal competence of the federal courts, however, this competence is not exclusive. There exists in reality a duality of competence between the federal and State tribunals regarding the enforcement and recognition of international or foreign arbitral awards. It will always be necessary, therefore, to determine the competent jurisdiction.

4. Finally, another characteristic regarding the recognition and enforcement of foreign or international arbitral awards in the United States of America should be noted.

In the context of a domestic arbitral dispute, the Supreme Court indicated that the courts could refuse the recognition and enforcement of an arbitral award in the case of manifest disregard of the law.⁶⁴

Such a rule, without any elaboration, forces the courts to act in an interpretative manner and it may be fair to assume that such a rule would allow the courts ability to review the merits of an award. The higher American courts have not yet had to decide whether this ground for refusing the recognition of arbitral awards applies to foreign arbitral awards governed by the New York Convention (the case not being provided for by the Convention itself). Consequently, the incertitude continues, even though it appears that the lower courts have not used the standard in the context of the New York Convention.⁶⁵This ground for refusing the recognition of a foreign award may, however, apply to international and foreign arbitral awards falling outside the scope of the New York Convention.

We have now completed our examination of the obstacles and benefits to arbitration within the federal structure of the three State parties to the NAFTA. They affect both corporations situated within the NAFTA jurisdiction and those corporations outside but doing business there.

For those corporations outside but doing business within the NAFTA jurisdiction, particularly European corporations, there are still other problems which are likely to arise, given that the practice of the courts and the arbitrators may prove to be significantly different from the practice they are used to. Article 2022 of the NAFTA, if it is followed by concrete measures, could alleviate the effect of these differences.

II. The Development of Arbitration in Comparison with European Practice

Those negotiating contracts from outside the NAFTA jurisdiction, in relation to business carried out within the jurisdiction, are met with legal principles different than those to which they are accustomed. Frequently. any awareness of these principles occurs only at the time of a dispute. when the foreign party finds the provisions of its contract defeated. This situation can arise either because the law which turns out to be applicable to their dispute is little known (in the case or Mexican law), or because the law applicable is the common law (in the case of the United States of America and Canada, with the exception of Quebec).

Judicial uncertainty arises under two important aspects: the rule of "compétence/compétence", and the designation and application of international trade practice, more commonly known as lex mercatoria. This section of the paper will examine the likely impact that Article 2022 of the NAFTA might have, as well as the constructive role that the Advisory Committee could bring to private commercial disputes.

A. Implementation of Arbitral Clauses

1. The doctrine of "compétence/compétence"

1.1 In the field of international arbitration, the triggering of an arbitration clause at the instance of a dispute causes different responses and actions depending on the national origins of the parties.

A defendant, who is not always a willing party to an arbitration. often attempts to prove the invalidity of the arbitration clause. In contrast to the practice of European corporations and counsel, who are generally from a civil law background, common law counsel, and in particular American counsel usually raise the issue of the validity of the arbitration clause before the courts.

The problem raised. which has given its name to the principle of "compétence/compétence"⁶⁶ is the following: can the arbitrators determine their own competence? To varying degrees between civil and common law countries, the principle that the arbitrators are competent to determine their own competence is generally adhered to.

The rule of "compétence/compétence" is that the arbitrator may determine the existence or validity of the arbitral clause. However, the rule is applied significantly differently in Continental Europe than by the North American common law courts.

In Continental Europe, an arbitrator determines his or her own competence and the validity of the arbitral clause in either an interim or final award. The courts have the capacity to do so only at the time of execution of the award or the appeal of the execution of the award.

ln contrast, in the common law countries and particularly in the United States of America, a party may appear before the courts even before the constitution of the arbitral tribunal to order to determine the validity of the arbi1Lral clause and, consequently, the competence of an arbitrator. In fact, the American courts must make a preliminary finding regarding the competence of the arbitral tribunal⁶⁷ even if the parties have provided the arbitrators with such a power.⁶⁸

When in a dispute with an American company, therefore a European party may easily find itself initially subject to the authority of an American court despite having inserted an arbitration clause in their agreement.

However, in the case of arbitration clauses with a wide scope of application, often described as "broad arbitration clauses", the American courts will usually compel the arbitration. An arbitration clause following the model recommended by the ICC may be considered as a broad arbitration clause.⁶⁹

In Canada, the common law provincial courts show a certain reluctance to grant an arbitrator the right to determine his or her own jurisdiction as well as being highly interventionist.⁷⁰ However, the implementation of the UNCITRAL Model Law throughout the Canadian province should assist the recognition of arbitration clauses.

1.2 Mexican arbitration law, however, grants arbitrators the power to determine their own competence and the existence and validity of arbitral clauses.

In Quebec, arbitrators are similarly competent to determine their own competence: they may. therefore. determine the validity of their appointment and the extent of their powers. Article 943 of the Code of Civil Procedure provides that "the arbitrators may decide the matter of their own competence" [trans.].

Both Mexico and Quebec have a legal system derived, at least in pan, from the civil or roman law.

2. The Interpretation of Arbitration Clauses

The reluctance of the North American courts to make room for arbitration can be seen equally in the interpretation they attribute to arbitration clauses.

2.1 ln the United States or America, the interpretation of arbitration clauses and their scope of application are governed by federal law, that is, the FAA.

Although the Supreme Court established the principle that arbitration should be encouraged, in reality the courts tend to restrict the scope of arbitration clauses in order to retain jurisdiction.

An arbitral clause providing that disputes arising under the contract shall be submitted to arbitration are construed more narrowly than an arbitration agreement providing for all disputes arising out of or relating to the contract.⁷¹

According to American jurisprudence, the use of the expressions "arising under" or ''arising out of' without the additional clause of "relating to" confines the arbitrators. authority to disputes regarding the interpretation or execution of a contract. giving them no authority to handle disputes which arise upon the termination of the contract. Under such jurisprudence, disputes arising upon the termination or a contract are relegated to the jurisdiction of the courts.

Such subtle distinctions are beyond the grasp of Western European negotiators for whom English is usually not their national language.

2.2 Quebec jurisprudence provides a similar environment of legal uncertainty caused by the courts· exercise of fine linguistic distinctions. In their article entitled "L'application des conventions d'arbitrage au Canada: une difficile coexistence entre les compétences judiciaire et arbitrale",⁷²Sabine Thuilleaux and Dean M. Proctor illustrate that a party to an arbitration can avoid an arbitral clause in order to create time to speculate on the definition of its cause of action. They suggest that the present Quebec jurisprudence undermines the effectiveness of any arbitration agreement:⁷³ "it suffices that an applicant wanting to avoid the operation of an arbitration agreement simply ground its action, partially or entirely, on the respondent's responsibility in tort to establish the competence of the court hearing the matter" [trans.].

The agreement to develop arbitration expressed in the NAFTA must make way for the correction of such legal uncertainty: paragraph l of Article 2022 states that "each party shall to the maximum extent possible, encourage and facilitate the use of arbitration ...".

In a legal system intent on making arbitration a method of dispute resolution, it is essential that:

1. the will of the parties not be defeated by the narrow interpretation of arbitral agreements; and
2. that arbitrators be left the responsibility of determining their own competence: and the validity and scope of the arbitral clause.

Article 2022 should guide the courts in their interpretation of arbitral agreements and encourage them to return the parties to the authority of the arbitrator, except in cases where the arbitral clause is manifestly inadequate.

Recall that paragraph 2 of Article 2022 of the NAFTA, with regard to the principle established in paragraph 1, provides that: "To this end, each party shall provide appropriate procedures to ensure observance of agreements to arbitrate…".

Further, the Advisory Commjttee on Private Commercial Disputes must examine the possibility of creating directives regarding the doctrine of "competence/compétence" and facilitating a wider interpretation of arbitration agreements. The Committee should not simply content itself with the provision contained in Article II-3 of the New York Convention: "the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an [arbitration] agreement, (...) refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed."

The Advisory Committee on Private Commercial Disputes may draw, in particular, from Article Vl-3 of the European Convention on International Commercial Arbitration, signed in Geneva on April 21, 1961, which provides:

"Where either party to an arbitration agreement has initiated arbitration proceedings before any resort is had to a court, courts of Contracting States subsequently asked to deal (...) with the question whether the arbitration agreement was non-existent or null and void or had lapsed, shall stay their ruling on the arbitrator's jurisdiction until the arbitral award is made, unless they have good and substantial reasons to the contrary.

B. The Possible Development of Trade Usages within the NAFTA Jurisdiction

1. Many European arbitration agreements involving several corporations designate relevant trade usages among the laws to be applicable in the event of a dispute. The doctrine is known as lex mercatoria and much of the work relating to it was by Berthold Goldman."⁷⁴

Under this doctrine, businesses with international commercial relations can avoid being subjected to national law which does not correspond to the realities of international trade by establishing a-national rules more appropriate to actual trade practice. The doctrine employs existing trade usages common, for example, to an industrial sector or an economic region: it is the trade sectors themselves which have created the applicable international trade usages.

The concept of lex mercatoria appealed to legal practitioners who have included it in arbitration agreements, forcing arbitrators to do some original work in researching the practices relevant to a geographical or industrial sector. ln Continental Europe, the doctrine of lex mercatoria has also received a degree of recognition from national legislatures and international conventions. In many national statutes, arbitrators are competent to apply trade usages, for example. Article 1496 of the French New Code or Civil Procedure provides that arbitrators shall in every case consider relevant trade usages.

International Conventions have also adopted the concept of international trade usages. For example, Article VII-1 of the European Convention on International Commercial Arbitration of April 21, 1961 provides:

''(...) In both cases the arbitrators shall take account of the terms of the contract and trade usages."

The United Nations Convention on Contracts for International Sale of Goods opens an even larger door to the use of trade usages. For examples Article 9.2 provides:

"The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is wide known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."

2. It must be noted that the doctrine of lex mercatoria has not known a similar application in common law countries, particularly North America. It seems that American and Canadian arbitrators are unfamiliar with the principle and have not been inclined to use it. The federal and State courts have been similarly reluctant to apply trade usages.

However, this attitude may change under the will of the NAFTA signatories to foster and develop arbitration. Recent provincial international arbitration statutes in Canada have made reference to trade practice including, most notably. the statutes of Quebec and British Columbia.

As for other common law jurisdictions, the rejection of lex mercatoria and international trade usages has not been total. While arbitrators and the courts have been reluctant to directly apply trade usages, trade practice is frequently applied indirectly: the ground relied upon most often by American federal and State courts for refusing to set aside or not recognise a foreign or international arbitral award is the agreement of the parties to apply the rules of lex mercatoria, or the arbitrator's reliance on international trade practice to render the award.

The US Supreme Court's decision in Scherck v. Alberto-Culver Co.⁷⁵ recognised that adherence to the New York Convention meant the encouragement and recognition of arbitration agreements and the development of uniform principles of recognition.

Such a willingness to enforce the parties' arbitral agreement would give effect to the designation of international doctrines, such as trade usages and lex mercatoria.⁷⁶

The NAFTA and the Vienna Convention on Contracts for International Sale of Goods should assist the development of trade principles relevant to the geographical region under the NA FTA. The principal fault found in the doctrine of lex mercatoria is that it will never amount to a worldwide uniform system. Instead, lex mercatoria will remain a fragmented body of law applicable to parties from the same geographical region.

3. It is conceivable that the Advisory Committee on Private Commercial Disputes could create and publish, even simply as a directive, trade usages applicable under the NAFTA jurisdiction in order to define a regional lex mercatoria. Such a document would serve as a reference tool for corporations outside the NAFTA jurisdiction.

This possibility provides a glimpse of the measures that may be taken to give effect to paragraph 1 of Article 2022, which provides that recourse to arbitration shall be encouraged and facilitated.

The first step under paragraph 1 of Article 2022 should be to gather the trade usages relating to the international sale of goods which are followed in the NAFTA region.

Canada, Mexico and the United States of America are each party to the Vienna Convention on the International Sale of Goods. Each party is, therefore, bound by Article 9 of the Convention which refers to usages ''in international trade'' which are '"widely known to, and regularly observed by, parties lo contracts or the type involved in the particular trade involved''.

The Advisory Committee on Private Commercial Disputes might attempt to gather the rules and usages known by trade sections and by specialised North American arbitration institutions. The development or common principles regarding the international sale of merchandise would permit the rapid growth of arbitration. At the same time, it would provide a precise reference to be used by American practitioners reluctant to employ the doctrine of lex mercatoria and to European practitioners interested in avoiding the unilateral application of unknown national statutes.

The establishment of international trade principles and usages could extend to other areas of international sale, particularly in relation to arbitral procedure or practices governed by the principal types or contract: turn­key operation contracts, oil and petrochemical agreements, etc.

It appears difficult, if not impossible, to compare the NAFTA and the Advisory Committee on Private Commercial Disputes to the experience gained from the treaties governing the European Economic Community ("EEC") and the European Court of Justice ("ECJ"). However. an analogy may facilitate the establishment of an objective for the Advisory Committee in terms of developing common commercial principles and usages with the NAFTA jurisdiction. The EEC⁷⁷ is a region far more integrated as a result of the implementation of a number of statutes dealing with the EEC as a whole. The ECJ, itself, is an independent jurisdiction which settles disputes and whose decisions govern the member States of the EEC. However, the methods and reasoning employed by the ECJ could provide guidance to the NAFTA Advisory Committee.

In order to fill the gaps between the EEC statutes and to settle disputes, the ECJ investigates the principles applicable to the European Economic Community, being those common to the legal system of each member State.⁷⁸ The Court of Justice delineates, therefore, those legal principles common to the national law of each member State. These common principles are usually in the nature or public or procedural law (right to an adequate defence, principles of legal security).

Among its responsibilities, the Advisory Committee on Private Commercial Disputes could commence, using the ECJ as a model, to extract those trade principles and usages generally applicable throughout the NAFTA region as a means to assist the settlement of private commercial disputes.

Again using the EEC as a model, the Free Trade Commission created under the NAFTA could submit to the Advisory Committee, also as a directive, the problems in interpreting international arbitration agreements.

Such a directive would assist the uniform application of international conventions. particularly the New York Convention, which the courts under the NAFTA jurisdiction could then follow.

By way of comparison, the EEC member States have entrusted the ECJ with the application of any convention relating to the European Economic Community. This involves, in particular, the September 27, 1968 Brussels Convention regarding the recognition and enforcement of foreign judgments and the June 19, 1980 Treaty of Rome relative to contractual obligations.⁷⁹

The examination above showed several obstacles to arbitration which exist in the territory under the NAFTA. However, recent international arbitration legislation in Canada and Mexico should assist the rapid growth of international arbitration within the NAFTA.

The Advisory Committee on Private Commercial Disputes has a lar task before it to establish the regions governed by the NAFTA as a jurisdiction conducive to arbitration.

The Advisory Committee will equally be responsible for dealing with more far-reaching issues, such as other methods for the settlement of private commercial disputes. The Advisory Committee may follow the work already executed by international institutions such as the International Chamber of Commerce. to which private industry is indebted to for rules regarding conciliation and expertise.

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