International trade, particularly within the Pacific Rim, is a big deal. The Census Bureau reports that U.S. trade with Pacific Rim countries in 2017 was almost $1.3 trillion. With the busiest ports in the hemisphere, Los Angeles and the businesses located in the Southern California region are major participants in much of that commercial activity. The Pacific Council’s Global Los Angeles initiative, and Mayor Garcetti’s recent State of the Global City address, reinforce that this region is, and should be, "a huge presence on the world stage."
Thus, it is good news for California businesses engaged in international trade and investment that they are about to get a boost. Senate Bill 766, which passed the California legislature without a single opposing vote, and was signed by Governor Jerry Brown on July 18, 2018, will establish the importance of international arbitration in California. In doing so it will provide great advantages to California companies and the California economy.
SB 766 cleared up a quirk in California law that had deterred international arbitrations from being sited in California, and often harmed California international businesses. The problem was a 20-year-old California Supreme Court case that had the effect of barring non-U.S. lawyers from being able to appear in an international arbitration in California. Arbitration clauses are standard in much of international trade and investment to provide a neutral forum to resolve potential disputes. Lawyers from outside the United States were reluctant to agree to arbitration clauses that set California as the seat of an international arbitration since those lawyers could not appear in the arbitration for their clients.
California should have been and now will become a significant home of international dispute resolution, particularly disputes in the Pacific Rim.
In the meantime, international arbitration grew throughout the world and in other U.S. states and cities. Because any nation’s courts will necessarily be "foreign" to one or more of the parties, international arbitration offers an attractive alternative—a neutral and impartial forum for resolving international commercial disputes in cross-border transactions. It is favored for the enforceability of the resulting arbitration award in most international jurisdictions under an international treaty known as the New York Convention, providing that each of its signatory nations will recognize and enforce arbitration awards covered by the Convention, subject to limited exceptions. This treaty avoids the problems associated with enforcing U.S. court judgments abroad.
The Economist magazine reported in 2014 that international arbitrations brought $1 billion a year in economic benefits to New York City, not just in direct expenditures on the legal process, but also including all travel related industries. During this period of growth, Miami has also become an arbitration center. Arbitration in the Pacific Rim grew in Singapore, Hong Kong, Shanghai, and Beijing. Singapore especially has found great success promoting its international dispute resolution capacities for all business in the Pacific Rim.
California should have been and now will become a significant home of international dispute resolution, particularly disputes in the Pacific Rim. The companies are here; knowledgeable lawyers are here; highly sophisticated arbitrators are here; and participants in Pacific Rim business often have relatives and personal connections here.
The increasing attractiveness of international arbitration in California, with its ties throughout the Pacific Rim, should also benefit the entire California economy.
The barrier to all this—the prohibition on non-U.S. lawyers appearing here—has now been removed. SB 766 permits lawyers admitted to practice in any jurisdiction in the world to come here and represent their clients in international arbitration. It does not permit them to appear in any other legal proceeding in California, and while appearing in California international arbitrations foreign lawyers will be subject to the ethics rules of the State Bar of California. All these provisions mirror rules in other U.S. jurisdictions permitting foreign lawyers to appear in international arbitrations.
SB 766 began with a study group appointed by the Chief Justice of the California Supreme Court, which was well aware of the difficulties facing international arbitration in California. The study group recommended following a model American Bar Association set of rules permitting representation by foreign lawyers in international arbitrations. State Senator Bill Monning (D-Monterey), now Senate Majority Leader, authored SB 766 based upon the recommendation of the study group. SB 766 was viewed by the state Senate and Assembly Judiciary Committees as an economic development bill as much as anything. The bill was passed without a single dissenting vote in either the state Senate or Assembly. The new law will go into effect on January 1, 2019.
International arbitration is not only for large companies occupying positions of global leadership. The numerous Pacific Rim diaspora communities, the small business exporter to China, the importer of materials from other countries, those whose business include export-import considerations, and anyone in California in a joint venture or seeking financing from abroad will have a valuable alternative to court litigation to resolve disputes. At best it is a protective legal tool, and at least it is a significant bargaining chip as they negotiate the terms of their commercial arrangements.
All California businesses, especially those doing business in the Pacific Rim, should be aware of SB 766 and the advantages it provides to them.
All California businesses, especially those doing business in the Pacific Rim, should be aware of SB 766 and the advantages it provides to them. And the increasing attractiveness of international arbitration in California, with its ties throughout the Pacific Rim, should also benefit the entire California economy. The fourth largest economy in the world, in both its significant centers, Los Angeles and San Francisco, should be a major home to international arbitration. It now will be.
Michael C. Kelley is a Pacific Council member and a partner at Sidley Austin LLP.
Richard Chernick is a JAMS mediator and arbitrator and serves as managing director of JAMS' Arbitration Practice.
Howard B. Miller is a JAMS mediator and arbitrator, as well as a Fellow of the Chartered Institute of Arbitrators.
The views and opinions expressed here are those of the authors and do not necessarily reflect the official policy or position of the Pacific Council.