Resolving Legal Disputes in Emerging Markets: What Social Entrepreneurs Should Know About International Arbitration
Like other business owners, most social entrepreneurs would rather focus on growing their business than litigating a legal dispute — particularly one that involves the complexities of cross-border commerce and requires them to navigate foreign legal systems. In fact, with the added pressures of trying to manage their business while meeting impact goals, social entrepreneurs may have even less bandwidth for these issues than typical businesspeople. Yet the unfortunate reality is that, despite an entrepreneur’s best intentions, legal issues may sometimes arise between a social enterprise and its suppliers, investors, employees or customers.
In fact, the “double bottom line” philosophy of social enterprise may even lead to additional scenarios that can result in legal conflicts. And since many social enterprises operating in emerging economies are run by entrepreneurs based in more developed countries, these conflicts often require some form of international dispute resolution. For example, imagine you’re a social entrepreneur with a business-to-business model who is committed to providing a safe environment for your workforce to thrive. After the pandemic struck, you found it impossible to maintain social distancing in your production facility and had to pause production to maintain worker safety. But without your products, one of your buyers is unable to maintain their own production schedule and is demanding that you continue to supply them with your products, as stipulated in your sales contract — despite the hazardous working conditions this would entail. They might bring a legal claim against your company, and you would need to defend yourself.
Or imagine the opposite scenario: You have an ethical production stipulation in your supply agreement with an overseas supplier, but you discover that the company is falling short of this obligation by failing to maintain safe worker facilities or meet environmental standards. You may want to bring a breach of contract claim against this supplier, requiring some form of international dispute resolution.
In light of these potential scenarios, it is essential that social enterprises operating in emerging markets have a basic understanding of how best to resolve international legal conflicts related to their business. In my nearly 10 years of legal practice involving international commercial disputes, I’ve found that international arbitration, rather than traditional litigation, is the preferred method for resolving most of these issues. Scholars like Deborah Burand at New York University Law School’s Grunin Center for Law and Social Entrepreneurship have also noted the advantages of international arbitration for resolving disputes involving impact investments in emerging markets. Below, I’ll discuss this method of dispute resolution, how it differs from traditional litigation, and the benefits it can offer social entrepreneurs.
Key Differences Between Arbitration and Litigation
Most of us are familiar with business litigation — where a company that has been wronged by a counterparty brings a civil suit for damages in a local court. In contrast, international arbitrations are conducted in a neutral format outside of court, which is presided over by international commercial law experts, referred to as arbitrators. They’re usually administered by arbitration organizations or other professionals in international commerce.
Arbitration can be utilized only when both parties agree to submit their dispute to an arbitrator — and by implication to accept the arbitrator’s decision. This is nearly always done before the conflict occurs because both parties are often reluctant to agree on much of anything once a dispute has crystallized. It is usually included in the contractual documentation agreed between commercial parties, like a production agreement or distribution contract.
The purpose of international arbitration is to offer both parties the confidence that their dispute will be handled efficiently and impartially, and the result will be reliable. Before the proliferation of international arbitration, many companies and investors were apprehensive about investing or operating in emerging countries because of the uncertainty surrounding their legal systems.
Another key difference between litigation and arbitration is that arbitration can often be faster and more efficient than court litigation. It also provides a greater degree of flexibility, allowing measures such as remote hearings that wouldn’t normally be accepted by local courts, but that can be very helpful to businesses based outside the country.
However, while arbitrations allow parties to avoid court litigation during the majority of their dispute, once an award is issued by the tribunal of arbitrators, it usually must be enforced through the courts in the jurisdiction where the defendant has assets. This involves taking the award to a court and requesting that the “winning” company go through local legal procedures for recovering a judgment. This brings up another important difference: International arbitration awards are generally easier to enforce in local courts than foreign court judgments, which is one reason why they are often used in the international commercial context.
Benefits of International Arbitration for Social Entrepreneurs
Since social enterprises are often based in different jurisdictions than the commercial parties they work with, the ability to avoid bringing a claim in their counterparty’s local court is a key benefit of international arbitration. This distinction has been especially helpful in facilitating international development projects in emerging markets.
The specialization of advocates and arbitrators is another benefit that’s particularly important in the social business context. It is extremely useful to involve professionals who are familiar with the unique goals of social enterprises, and the balancing that takes place when working with a double (or triple) bottom line company.
For example, in a dispute involving a failed (or restructured) impact investment, it is important to take into consideration how all stakeholders might be affected by a decision. This would naturally include the impact investor and the social enterprise investee — but it might also include any beneficiaries of that social enterprise. Having arbitrators who are attuned to the needs of all parties can reduce the likelihood that their decision will cause unexpected negative repercussions for some stakeholders.
There’s a related benefit to involving specialized arbitrators in these decisions: For example, some disputes between board members, directors or other stakeholders of a mission-driven enterprise may involve a business decision that balances the company’s financial health against its ability to make a social impact or other challenges that wouldn’t necessarily come up in a traditional commercial dispute. Another example is where financial damages involving mission-driven companies might be difficult to calculate given the multiple bottom lines involved — an issue I’ve discussed in the context of supplier breaches of ethical production commitments. In these circumstances, both sides of the dispute would ideally want both the advocates for their position and the arbitrator to have a strong background in the social impact sector, so that the arbitrator’s decision reflects a deep understanding of the issues under discussion and the context in which the business is operating.
In addition to this background, it’s useful to have professionals working on the dispute who believe in the value of social entrepreneurship. If disputes are litigated and decided by individuals who are indifferent (or even hostile) to the development of social entrepreneurship law, then they won’t bother to take into account how their decisions might affect social entrepreneurs in the future — or the growth of the field in general. For this reason, it is crucial to involve professionals with a deep commitment to the evolution and success of social entrepreneurship.
Another important benefit of international arbitration which is particularly relevant to emerging-market enterprises is that many arbitration organizations have rules providing for smaller value disputes to be resolved using expedited procedures. These rules differ across organizations, but in general, a dispute is a good candidate for expedited proceedings if it falls below a few million U.S. dollars. Many impact investments and social business disputes could fall into this category. Expedited proceedings usually allow for a dispute to be resolved within about six months, and without lengthy discovery or hearings — this greatly reduces the time and costs involved.
In addition, international arbitration generally favors utilizing flexible and efficient procedures. This was certainly evident over the course of 2020, as the effects of COVID-19 limited people’s ability to travel, and many proceedings shifted to virtual settings. While negotiating an arbitration agreement, the parties may also designate which law they would want to follow when interpreting the contract. This is an additional layer of flexibility that can often provide the parties an extra level of comfort.
A Note About International Arbitration vs. Consumer and Employment Arbitration
Many entrepreneurs I speak with who are interested in social justice issues have only a faint familiarity with arbitration or have heard of it in a negative light. This is often because of the recent criticisms raised against arbitration being used as a tool to restrict people’s ability to bring class action or employment claims.
You might have heard of arbitration in this negative light. However, international arbitration is very different from consumer or employment arbitration. This is in large part because the parties to an international arbitration are generally sophisticated commercial entities who have reasonably equal bargaining power — they’re not like most employees or consumers.
I hope this has given you a brief introduction to international arbitration so that, in the unfortunate event that you do face a legal dispute, you will be familiar with one common way of resolving the matter. If you have any follow-up questions or would like to discuss a legal issue your business might be facing, you can contact me through my email link in the bio below.
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