International arbitration is a voluntary and binding method of dispute resolution that allows parties from different countries, legal systems and cultures to settle their disputes outside of traditional legal channels. When disputes arise from international business transactions or other international relationships, an arbitrator, who is a neutral third party, reviews both sides of the conflict and then renders a decision in the matter. The disputing parties are legally bound by the decision.
Globalization has led to the need for an efficient international dispute resolution system. Arbitration is especially practical in the context of international transactions. Parties might be unfamiliar with foreign legal systems, might face language barriers and could be unfairly disadvantaged if required to litigate in a foreign country.
Arbitration is voluntary and is created by contract. Parties either agree to submit future disputes to arbitration during initial contract negotiations, or they agree to enter into an arbitration agreement after a dispute arises. Arbitration agreements generally include a range of disputes subject to arbitration, a choice of applicable law, a choice of arbitrator and arbitration institution, language for the conduct of the arbitration and a choice of procedural rules and other bureaucratic matters.
There are many reasons why parties elect to have their international disputes settled through arbitration instead of litigation. International arbitration provides a neutral forum where neither party feels at a cultural disadvantage. Also, arbitration allows parties to resolve complicated disputes more quickly and cheaply than by going through the court system. Unlike judges and juries, arbitrators are chosen because of their specific expertise or knowledge, and parties are free to devise their own arbitral procedures.
International arbitration also provides stricter confidentiality than the legal system, which can be especially important in commercial settings. Finally, arbitration awards are binding and often easier to enforce than national court judgments. Ratified by hundreds of countries, the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards of 1958 — commonly referred to as the "New York Convention — requires that signatory countries recognize and enforce international arbitration agreements and foreign arbitral awards issued in other participant countries.
At the conclusion of arbitration, the arbitrator's decision is final and binding and generally not subject to appeal or to review by a court. This is fundamentally different from mediation, even though both fall under the category of alternative dispute resolution. Whereas mediation is a facilitated negotiation in hopes of reaching a settlement, arbitration ends with a final decision, similar to a standard court case. Also unlike mediation, when parties agree to resolve their disputes through arbitration, they generally relinquish their right to pursue that matter through the courts.
International arbitration is also distinct from the arbitration practiced in many countries. It has evolved into its own field of dispute resolution with its own standard practices and rules. There are professionals that specialize only in international arbitration and many international arbitration institutions, including the International Centre for Dispute Resolution, the Court of Arbitration of the International Chamber of Commerce, the International Centre for Alternative Dispute Resolution and the United Nations Commission on International Trade Law.