Introduction –

Offshore Financial Centers are an integral part of our global economy. The international community has often not understood their function. It has had an unfounded apprehension of their participation in the erosion of the developed economies tax base.

The global competitive marketplace has emphasized the craving for cost reduction and Offshore Financial Centers have attempted to accommodate this appetite through deregulated business environment and attractive tax regimes. The world’s Offshore Financial Centers and Tax Havens have tailored their legislation to suit all of these marketplace demands.

The use of Offshore Financial Centers requires a comprehensive understanding of international taxation laws. The application of planning concepts draws upon the ability to combine tax principles with international law and banking to achieve beneficial results. In understanding how to meld these disciplines, it is important to bring together pertinent international law, banking, and taxation. Conceptually, the overall arrangement of the various disciplines should serve to enable one to meld their particular tax law with the international financial laws of the global community.

This segment is intended to establish a reference point in the practical use and application of these vital and essential sovereigns that serve as necessary components in transnational enterprise. One vital legal risk and consideration involves the distinction between contracts of parties subject to international litigation and the use of arbitration agreements. Principles of the enforceability of judgments rendered by sovereign courts in international litigation is contrasted to an arbitration proceeding and subsequent consequences. (See Foreign Trusts and Legal Risks, TaxConnections December 24, 2013)

Arbitration Principles and Considerations

The principles of the process of international arbitration with regard to international transaction disputes and the legal risks that are imposed upon them are the focus of this writing. The arbitration process offers an alternative solution to international commercial dealings in which parties seek certainty and predictability to their transactions.

International arbitration may be understood to be a consensual agreement to settle disputes seeking resolution apart from the traditional legal structure of the judiciary. (1) It is a voluntary method of resolving disputes other than by litigation. As a process, it has some significant points of value when compared with many aspects of international litigation.

As opposed to international litigation where proceedings are public and do not provide confidentiality, arbitration can provide privacy in resolving disputes. This can take on great importance with respect to intangible property and contractual disputes where confidentiality is desirable. Disputes often arise in connection with matters requiring great expertise and technical knowledge, and courts may not be as fluent in the particulars of the technicalities at issue. The contracting parties may foresee a dispute arising but wish to avoid the impact litigation could have upon its ongoing transactions.

Thus far arbitration has been regarded as a less expensive method of resolving disputes, though that may be changing in many jurisdictions as it gains popularity and demand increases. As the demand increases for competent forums, the expense has increased in concert. For these reasons and others, as well as to inject certainty and predictability to contractual relationships, arbitration may offer a preferable resolution technique.

Arbitration carries a burden similar to litigation, which centers on the forum selection clause essentials of a contractual agreement. As with litigation, the choice of the parties affects the procedures of the courts that may otherwise be competent to hear a particular matter. Access to choice and the procedure of arbitration can be termed an issue of policy. An important consideration when evaluating an Offshore Financial Center is whether the status of the local legal structure provides for the process of arbitration. If it does, the questions of where and how it is structured are then explored.

This consensual process of arbitration broaches the concept of party autonomy as it does with choice of the parties in litigation. An agreement to arbitrate is considered separate from the contract in which it is contained; the purpose is to provide autonomy in the designation of jurisdiction of resolution. (2) Local law pertaining to jurisdiction and the validity of arbitration autonomy is an important consideration. The selection of an arbitral forum by the parties should be made with consideration of a sovereign whose courts will not interfere in the arbitral proceedings. A possibility of judicial interference may create incentives for dilatory tactics, with expensive and confusing procedural disputes. (3) The purpose here is contemplated or prospective arbitration rather than post-dispute arbitration or compromise. (4)

In some countries, courts view party autonomy and advance-forum-selection clauses in an arbitration agreement as the dictation of legislation and usurping of a particular court’s jurisdiction. Normally a country will have in place a statute which either recognizes the parties’ right to arbitration proceedings outside of the courts of jurisdiction or has local law deeming arbitration and forum selection designation as an ouster of the courts from its jurisdiction. Those that deem arbitration and forum selection as an ouster of jurisdiction often frustrate the ability of parties to have a valid arbitration agreement. (5)

Agreements to arbitrate future disputes are usually contained in a provision of the commercial agreements of the parties. Whether future disputes can be arbitrated is a question of the local law of the chosen forum. There is not a body of controlling international law governing this legal issue. In looking to local law, and for the purpose, it is helpful to examine the United States law and compare those views with prospective Offshore Financial Centers.

The United States case law of Breman v. Zapata Off-Shore Co., (6) reflects the issues that arise concerning contracts containing within them arbitration clause agreements and inclusion of forum selection provisions. This generally is based upon the assumption that basic contract defenses such as fraud, party parity or over-reaching, and level field bargaining power are not at issue.

Breaking down the party autonomy issue, an arbitration clause agreement contained in a contractual agreement can be considered separate from the contract. The autonomy of arbitration is designed to permit the arbitrator to determine its own jurisdiction. If a valid contract defense issue is raised pertaining to the contract, the arbitration agreement within the contract is construed as separate, valid, and enforceable, provided the contract issue is not directed to the arbitration provision. (7) Unless a contract defense can be shown relating specifically to the arbitration clause and not to the contract as a whole, the arbitration clause is treated as separable; that is, separate and standing on its own. This is a basic concept of arbitration provisions in contracts. The treatment of this contractual issue is of importance in the consideration of the Offshore Financial Centers’ various attributes and suitability.

This autonomy concept is the view shared by the United States and generally upheld internationally. It is specifically provided for in the ICC Rules of Conciliation and Arbitration (8) and the New York Convention. (9) Additionally in the United States, the Federal Arbitration Act provides a process to compel a contracting party to arbitration if the court is satisfied that the making of the agreement for arbitration or the failure to comply is not in issue. (10)

With respect to the choice of law in arbitration, the considerations are similar to those of recognition of international civil judgments. First the law that substantively is to be applied to the contractual agreement can be viewed as applicable to the arbitration agreement contained in the contract. A consideration is whether an arbitration clause constructed as autonomous and severable is subject to the substantive law that would be applied to the contractual relationship.

In the event the contracting parties fail to specify applicable law, the result could be the law applied would be the party’s domicile, the place where arbitration takes place, or the law applicable to the arbitration agreement. The basic consideration is which substantive law is applicable and whether the choice of law determines the law validating the arbitration agreement.

The other facet of the choice of law applicable to an arbitration provision is contained in the contractual agreement. Using United States law as a standard to formulate concepts of applicability in an offshore setting, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards takes the position that procedural law is applicable, be it that which is either selected by the parties or the law of the place of arbitration. (11) The laws of many countries limit the extent by which the parties can contractually exclude the application of national laws to activities conducted with the country. (12) This concept is sometimes referred to as arbitrability or the issue of whether some disputes are capable of being settled by arbitration. For purposes here the emphasis is the commercial aspects of contractual relationships subject to evaluation of legal risks.

In summary, it is certainty and predictability that are sought when trying to avail the taxpayer of the preferable tax treatment accorded in these desirable forums. The importance of arbitration consideration is that such agreements are enforceable in the United States. Contrast this with the previous conclusions pertaining to the enforceability of international civil litigation judgments. The United States has no treaty, convention, or bilateral agreement to enforce any foreign judgment resulting from litigation. (13) This is a double-edged sword. When the ability to avoid the enforcement of a judgment is sought, arbitration is not desirable and vice versa. When predictability is desired, arbitration can add that contracting assurance.

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Footnotes

1.. See, 10/International Arbitration, pages 605-646, Born and Westin, International Civil Litigation in The United States Courts, 1991, Kluwer Law and Taxation Publisher, Peventer, The Netherlands.

2. Id. at note 1.

3. Supra at note 56 at page 611. Also see, W. Laurence Craig, William C. Parks & Jon Paulsson, International Chamber of Commerce Arbitration Section 28.01 (1985).

4. Supra at note 1.

5. Supra at note 1.

6. 407 U. S. 1 (1972).

7. See generally, International Chamber of Commerce Arbitration, W. Laurence Craig, William W. Park and Jon Paulsson, Second Edition, 1990, ICC Publishing, Inc. New York, New York.

8. International Chamber of Commerce, ICC Rules of Conciliation and Arbitration, ICC Publishing S. A. (Paris, France 1993).

9. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Parties to this convention are The New York Convention on The Recognition and Enforcement of Arbitral Awards: (Algeria, Antigua and Barbuda, Argentina, Australia, Austria, Bahrain, Belgium, Botswana, Bulgaria, Burkina Faso, Byelorussian Soviet Socialist Republic, Cambodia, Cameroon, Canada, Central African Republic, Chile, China, Columbia, Costa Rica, Cuba, Cyprus, Czechoslovakia, Dahomeyn, Denmark, Djibouti, Dominica, Ecuador, Egypt, Finland, France, Germany, Ghana, Greece, Guatemala, Haiti, Holy See, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kenya, Korea, Kuwait, Lesotho, Luxembourg, Madagascar, Malaysia, Mexico, Monaco, Morocco, Netherlands, New Zealand, Niger, Nigeria, Norway, Panama, Peru, Philippines, Poland, Romania, San Marino, Singapore, South America, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Ukranian, Soviet Socialist Republic, Union of Soviet Socialist Republics, United Kingdom, United States of America, Uruguay and Yugoslavia. This does not reflect German reunification and the Soviet Confederation.

10. 9 USCA Section 4.

11. See Article II, Section 3 and Article III of the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards.

12. See, 10/International Arbitration, pages 605-646, Born and Westin, International Civil Litigation in The United States Courts, 1991, Kluwer Law and Taxation Publisher, Peventer, The Netherlands. See also, Mitsubishi Motors Corp., Inc. v. Soler Chrysler-Plymouth, Inc. 473 U. S. 614 (Sup. Ct. 1985).

13. The Federal Arbitration Act that states that a written provision to arbitrate existing or future controversies is valid, irrevocable and enforceable, except pertaining to grounds that exist in contract law. Congress has legislated that a written agreement to arbitrate is enforceable, valid, and irrevocable.

In accordance with Circular 230 Disclosure