April 15, 2019

By: Albert Bates, Jr. and Luke N. Eaton, Pepper Hamilton LLP

When international arbitration practitioners are asked where the most common international arbitration seats are located, California is rarely, if ever, mentioned. Despite being the world’s fifth largest economy, California lags behind its domestic competitors — New York, Washington, D.C., Miami and Houston — and even more so when compared to international destinations such as Paris, London, Geneva/Zurich, Singapore and Hong Kong.

From the arbitration lawyer’s perspective, the seat of arbitration is a critical choice during the negotiations. The seat determines the applicable arbitration law, which can have significant legal implications on the arbitral proceedings, including the extent of the role to be played by local courts with respect to the arbitration. But the real reason why cities are competing with one another to host arbitrations is money. Arbitrations, particularly international arbitrations, generate significant revenue to the host city. As an example, a commentator recently noted that the annual revenue to the New York economy from hosting international arbitrations exceeds $1 billion. Miller, “International arbitration finally comes to California,” California Lawyer (Aug. 24, 2018), www.dailyjournal.com/mcle/330-international-arbitration-finally-comes-to-california). See also Charles River Associates, “Arbitration in Toronto: An Economic Study” (2012) (estimating the total impact of arbitration on the economy of Toronto at $256.3 million in 2012), www.crai.com/publication/arbitration-toronto-economic-study.

On the international stage, while the United States has grown as a seat for international commercial arbitration over the past two decades, particularly with respect to Latin American disputes, its selection continues to trail its international counterparts. For example, in the 2018 Queen Mary/White and Case International Arbitration Survey, the six most popular seats among respondents were London (64 percent), Paris (53 percent), Singapore (39 percent), Hong Kong (28 percent), Geneva (26 percent) and New York (22 percent). The dominant factors cited by respondents for their preferences included the general reputation and recognition of the seat, the neutrality and impartiality of the local legal system, the national arbitration law, and the track record of the seat in enforcing agreements to arbitrate and arbitral awards.

This is not to say that the United States is not a significant player in the field of international arbitration. Indeed, a large number of international arbitrations are seated in the United States each year. In 2015, 777 institutional international arbitrations were conducted in the United States by the International Centre for Dispute Resolution, JAMS, and the International Chamber of Commerce (ICC) (excluding ICSID and ad hoc arbitrations). Of those 777 international arbitrations, 124 (or approximately 16 percent) were conducted in California, while 338 were conducted in New York (44 percent) and 182 were conducted in Florida (23 percent). See California Supreme Court International Commercial Arbitration Working Group Report and Recommendation (Apr. 25, 2017), https://newsroom.courts.ca.gov/news/court-working-group-recommends-proposal-for-international-commercial-arbitration.

To many, the relatively meek status of California in the international arbitration sphere has been a quandary. How does such a significant economy — which is home to internationally recognized companies, sophisticated courts and cosmopolitan cities — not have a greater presence in the international arbitration field? The curious status of California’s rank as an international arbitration seat has not been lost on Californians, and, most recently, the California legislature has attempted to turn the tide. Indeed, the state legislature’s recent decision to permit foreign practitioners to represent parties in international arbitration proceedings seated in California is a significant development and will likely aid the state’s efforts to promote itself as an arbitration hub. However, as explained below, there may still be much more to accomplish before California becomes a prominent seat for international arbitration.

The Fix to California’s Hostility to Foreign and Non-California Practitioners
One of the primary reasons behind California’s competitive disadvantage was its perceived hostility to foreign practitioners and non-California lawyers. This hostility stems from the 1998 California Supreme Court decision in Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 17 Cal.4th 119 (1998), which held that representing parties in international arbitration was the unauthorized practice of law and that a non-California lawyer could not practice or collect fees for work on international arbitration matters conducted in California.

Practically speaking, Birbrower prohibited non-U.S. and out-of-state attorneys from representing clients in international arbitrations or from serving as arbitrators in California. While the California Code of Civil Procedure was amended to implement cumbersome procedures to allow U.S. attorneys from other states to participate in arbitrations in California, foreign attorneys were not permitted to represent parties in arbitrations conducted in the state. See Working Group Report at 7.

On February 10, 2017, California Chief Justice Tani G. Cantil-Sakauye formed the Supreme Court International Commercial Arbitration Working Group and charged it with submitting a report to address whether foreign and out-of-state attorneys should be authorized to represent parties in international commercial arbitrations held in California. It was well-recognized throughout the Working Group “that California ideally should adopt a rule seen as friendly to foreign and out-of-state parties and attorneys, for they have many other jurisdictions from which to choose when drafting an international arbitration clause.”

California’s primary statutory scheme governing international commercial arbitrations is the California International Arbitration and Conciliation Act (CIACA), Cal. Civ. Proc. Code § 1297.11 et seq., which took effect on March 4, 1988. By its terms, the CIACA governs any international commercial arbitration “if the place of arbitration or conciliation is in the state of California,” subject to any contrary federal law or agreement that is enforced between the United States and any other country. Cal. Civ. Proc. Code §§ 1297.11-12. The CIACA sets forth a series of circumstances that qualify as “international,” as well as a nonexclusive list of relationships that are “commercial.”

Based in part on the recommendations of the Working Group, on July 18, 2018, California Governor Jerry Brown signed Senate Bill 766 to amend the CIACA. The amendment, which took effect on January 1, 2019, authorizes a non-California lawyer to represent parties in international arbitrations seated in California. As of January 1, 2019, California now permits an individual who is not admitted to practice law in California but who is a member in good standing of a recognized legal profession in the United States or a foreign jurisdiction “to provide legal services in an international commercial arbitration or related conciliation, mediation, or alternative dispute resolution proceeding” in California. Cal. Civ. Proc. Code §§ 1297.185-186.

Why California Makes Sense as an International Arbitration Seat
California is well-positioned to thrive as a center for international arbitration for the following reasons: (1) geographic and cultural proximity to Latin America and Asia; (2) metropolitan cities with strong legal communities, such as Los Angeles and San Francisco; (3) highly developed economy with many large internationally based companies; and (4) widely respected courts, as many view the Ninth Circuit and the California courts as among the most prominent and sophisticated courts in the United States. Two industries in particular warrant further discussion.

International Trade
In the area of international trade disputes, Southern California would seem to be a strong choice of venue, given that it is home to the Port of Los Angeles, one busiest ports in the world. The Port of Los Angeles is one of only five of the top 20 ports in the world located outside of East Asia. The Port of Long Beach is not far behind at number 22 in the world rankings. It is estimated that more than $400 billion worth of cargo passes through the ports of Los Angeles and Long Beach annually.

Construction and Energy
Construction and energy cases comprise a significant portion of the international arbitration caseload, and California would seem to be a prime choice for the arbitration of international construction disputes. Specifically, the ICC has reported that construction and engineering disputes accounted for 186 new cases in 2017, approximately 23 percent of the total new cases filed with the ICC. The energy sector followed closely behind with 155 new cases in 2017, representing 19 percent of the ICC’s 2017 caseload. In the 2018 Queen Mary/White & Case survey, 82 percent of the respondents projected growth in the number of international construction and engineering disputes.

The Uphill Battle
While the picture looks better after the recent amendments to the CIACA, California nevertheless faces an uphill battle to break into a competitive international arbitration marketplace. California must overturn years of established and institutional bias against the state as a seat of international arbitration. For example, members of the Working Group reported that the ICC secretariat previously would not seat an international arbitration in California, if given the choice, because of California’s prior prohibition against foreign attorneys representing parties in international commercial arbitrations. These attitudes must be changed, and decision makers must be convinced that California is friendly to foreign practitioners. Such a change in attitude and perception will not occur overnight.

Separately, while California is seeking to promote itself as an arbitration-friendly jurisdiction by opening the state to foreign practitioners, the state’s arbitration laws continue to pose other problems due to the complicated and sometimes conflicting interplay between the Federal Arbitration Act, the CIACA and the California Arbitration Act. For example, under these laws, the parties are free to incorporate their own rules of procedure into their arbitration agreements as long as they do not conflict with mandatory aspects of federal or state law. Both the CIACA and the California Arbitration Act also impose onerous disclosure obligations on arbitrators in California. Specifically, under the CIACA, a person serving as an arbitrator must disclose whether “the person, his or her spouse, or a person within the third degree of relationship of either of them, or the spouse of such a person,” meets any of several identified conditions that may imply bias or prejudice. Further, with respect to sole arbitrators, this disclosure obligation cannot be waived by the parties. Cal. Civ. Proc. Code §§ 1297.121-122. These requirements are very different from the typical impartiality and conflict of interest guidance in the international arbitration community. See, e.g., IBA Guideline on Conflicts of Interest in International Arbitration (2014), www.ibanet.org.

The Takeaway
While the amended CIACA is only one step, it is a significant step toward reaching the goal of promoting California as a center for international arbitrations. California has a huge economy, and deserves careful consideration when it comes to international arbitration. However, whether international arbitration users will overlook the perceived (albeit former) hostility to foreign practitioners and other peculiarities in the state’s arbitration laws and see value in seating their arbitrations in California remains to be seen.

Pepper Hamilton’s Construction Practice Group has an unparalleled record of resolving complex construction disputes and winning complex construction trials. Our lawyers counsel clients on some of the biggest, most sophisticated construction projects in the world. Chambers USA named our firm Construction Law Firm of the Year in 2018, and we are nationally ranked in Chambers USA, The Legal 500 United States, and U.S. News / Best Lawyer. With a national network of attorneys across 14 offices, including many with first-chair trial experience, we have the depth and breadth to try cases of any complexity, anywhere at any time. For more information about Pepper’s Construction Practice, visit www.constructlaw.com.

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