Will California become a hub for international arbitration?

Governor Jerry Brown has signed Senate Bill 766 into law, which should increase California's appeal as a destination for international arbitration -- one of the fastest growing fields in the legal industry.

Although the number of international arbitrations has been increasing rapidly, California has not been a popular jurisdiction in which to litigate them. The simple reason, according to a study group commissioned in 2017 by the California Supreme Court, is that foreign practitioners have been scared away by a 1998 California Supreme Court case holding that non-California lawyers violated the California Business and Professions Code if they participated in arbitrations in the state. See Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 17 Cal. 4th 119 (1998). The restriction was later removed for attorneys licensed in other U.S. states or territories, but the hurdles for foreign lawyers were sufficient to essentially cut California out of the multi-billion-dollar international arbitration business.

Under SB 766, any "qualified attorney" will be permitted to act in an international arbitration in California, provided his or her services have a sufficient nexus to the lawyer's home jurisdiction or the lawyer is associated with a California lawyer. Many lawyers from foreign jurisdictions will meet the "qualified attorney" test, and many international disputes likely will have the required nexus for the qualified attorney to represent clients in international arbitrations in California.

Chris Poole, the president and CEO of JAMS, explained the anticipated impact in a press release: "The passing of SB 766 will position California as a leading market for international arbitration proceedings by allowing the participation of out-of-state and non-U.S. lawyers. It will not only bring advantages to California, our businesses, and the statewide economy, but it provides a sophisticated legal market for businesses and attorneys participating in international arbitration proceedings."

The Global Business of International Arbitration

International arbitration is booming. According a 2018 study by White & Case LLP and the School of International Arbitration at Queen Mary University of London, 92 percent of in-house lawyers surveyed stated that international arbitration is their preferred mechanism for resolving cross-border disputes. The major international arbitration institutions generally have seen a steady uptick in the number of cases filed over the past five years, with new arbitration centers and institutions proliferating as they seek to carve out market share in the thriving business of international dispute resolution.

Legal jurisdictions are competing to share in the economic benefit that comes from being the host jurisdiction for these private proceedings. Within the past five years, the list of countries that have made or announced pro-arbitration reforms includes: Russia, India, Saudi Arabia, the United Arab Emirates, South Africa, Ukraine, Myanmar and Japan (among others). Similarly, New York, Florida and other U.S. jurisdictions have taken steps to welcome foreign attorney representation of parties in international commercial arbitrations. These reforms, similar to California's SB 766, have a singular goal: to attract more international arbitration.

Examining SB 766

SB 766 allows non-U.S. lawyers to be considered "qualified" for the purpose of international arbitration if they are:

"(a)... a member of a recognized legal profession in a foreign jurisdiction, the members of which are admitted or otherwise authorized to practice as attorneys or counselors at law or the equivalent.

"(b) Subject to effective regulation and discipline by a duly constituted professional body or public authority of that jurisdiction.

"(c)In good standing in every jurisdiction in which he or she is admitted or otherwise authorized to practice."

A qualified lawyer may participate in an international arbitration provided any of the following criteria are met regarding the services rendered:

"1. The services are undertaken in association with an attorney who is admitted to practice in this state and who actively participates in the matter.

"2. The services arise out of or are reasonably related to the attorney's practice in a jurisdiction in which the attorney is admitted to practice.

"3. The services are performed for a client who resides in or has an office in the jurisdiction in which the attorney is admitted or otherwise authorized to practice.

"4. The services arise out of or are reasonably related to a matter that has a substantial connection to a jurisdiction in which the attorney is admitted or otherwise authorized to practice.

"5. The services arise out of a dispute governed primarily by international law or the law of a foreign or out-of-state jurisdiction."

A "qualified" out-of-jurisdiction lawyer will be subject to the California Rules of Professional Conduct and the laws governing attorney conduct to the same extent as a member of the State Bar, which also can report complaints and disciplinary violations to the disciplinary authority of any jurisdiction in which the attorney is qualified.

The Case for Choosing California

The seat of arbitration, which does not have to be the same as the physical location of the hearing, is an important consideration in international arbitration. It establishes which national arbitration law will govern the recognition and enforcement of agreements to arbitrate, as well as arbitral awards. The Queen Mary University of London survey found that parties choose the seat of arbitration based on a variety of factors including: (1) the reputation of the forum, (2) users' perception as to the quality of the legal infrastructure, including its reputation for neutrality and impartiality, (3) the characteristics of the national arbitration law, and (4) a track record for enforcing arbitration awards and agreements to arbitrate.

Because the "seat" of arbitration often also becomes the physical location where the proceedings will be held, other considerations in choosing a jurisdiction include visa requirements and relative ease of witnesses being able to freely travel to the location of the arbitration, access to infrastructure, facilities, and support resources.

California is strong in each of these areas. It has strong national and state laws favoring recognition and enforcement of arbitral awards and agreements to arbitrate. It has sophisticated state and federal courts that do not have a reputation for regional bias. And it has world-class cities and transportation centers offering suitable access, facilities and resources to host international disputes.

It remains to be seen whether California will emerge as a hub of international arbitration. But signing SB 766 into law is an important first step in putting California on the international arbitration map.