If conciliation is not used or an agreement cannot be reached, the next step is arbitration. When all else fails, arbitration rather than litigation is the preferred method for resolving international commercial disputes. The usual arbitration procedure is for the parties involved to select a disinterested and informed party or parties as referee to determine the merits of the case and make a judgment that both parties agree to honor. Although informal arbitration is workable, most arbitration is conducted under the auspices of one of the more formal domestic and international arbitration groups organized specifically to facilitate the resolution of commercial disputes. These groups have formal rules for the process and experienced arbitrators to assist. In most countries, decisions reached in formal arbitration are enforceable under the law.

The popularity of arbitration has led to a proliferation of arbitral centers established by countries, organizations, and institutions. All have adopted standardized rules and procedures to administer cases and each has its strengths and weaknesses. Some of the more active are the following:

1) The Inter-American Commercial Arbitration Commission.
2) The Canadian American Commercial Arbitration Commission (for disputes between Canadian and US businesses).
3) The London Court of Arbitration (decisions are enforceable under English law and English courts).
4) The American Arbitration Association.
5) The International Chamber of Commerce.
The procedures used by formal arbitration organizations are similar. Arbitrations under the rules of the International Chamber of Commerce (ICC) afford an excellent example of how most organizations operate. When an initial request for arbitration is received, the chamber first attempts conciliation between the disputants. If this fails, the process of arbitration is started. The plaintiff and the defendant select one person each from among acceptable arbitrators to defined their case, and the ICC Court of Arbitration appoints third member, generally chosen from a list distinguished lawyers jurists and professors.

The history of ICC effectiveness in arbitration has been spectacular. An example of a case that involved arbitration by the ICC concerned a contract between an English business and a Japanese manufacture. The English business agreed to buy 100,000 plastic dolls for 80 cents each. On the strength of the contract, the English business sold the entire lot at $1.40 per doll. Before the dolls were delivered, the Japanese manufacturer had a strike; the settlement of the strike increased costs, and the English business was informed that the delivery price of the dolls had increased from 80 cents to $1.50 each. The English business maintained that the Japanese firm had committed to make delivery at 80 cents and should deliver at price. Each side was convinced that it was right.

The Japanese accustomed to code law, felt that the strike was beyond control (an act of God) and thus compliance with the original provisions of the contract was excused. The English, accustomed to common law, did not accept the Japanese reasons for not complying because they considered a strike part of the normal course of doing business and not an act of God. The dispute could not be settled except through arbitration or litigation; they chose arbitration. The ICC appointed an arbitration who heard both sides and rules that the two parties would share proportionately in the loss. Both parties were satisfied with the arbitration decision, and costly litigation was avoided. Most arbitration is successful, but success depends on the willingness of both parties to accept the arbitrator’s rulings.

Contracts and other legal documents should include clauses specifying the use of arbitration to settle disputes. Unless a provision for arbitration of any dispute is incorporated as part of a contract, the likelihood of securing agreement for arbitration after a dispute arises is reduced. A typical clause is as follows:

Any controversy or claim arising of or relating to this contract shall be determined by arbitration in accordance with the International Arbitration Rules of the American Arbitration association.

Including the number of arbitration, the place of arbitration (city and / or country) and the language of the arbitration in the clauses is also useful.

Although an arbitration clause in a contract can avert problems, sometimes enforcing arbitrations agreements can be difficult. Arbitration clauses require agreement on two counts: (1) the parties agree to arbitrate in the case of a dispute according to the rules and procedures of some arbitration tribunal, and (2) they agree to abide by the awards resulting from the arbitration. Difficulty arises when the parties to a contest fail to honor the agreements. Companies may refuse to name arbitrators, refuse to arbitrate or after arbitration awards are made, they may refuse to honor the award. In most countries, arbitration clauses are recognized by the courts and are enforceable by law within those countries. More than 120 countries have ratified the Convention on the Recognition ad Enforcement of Foreign Arbitral Awards, also known as the New York Convention, which binds to uphold foreign arbitration awards. Under the New York Convention, the courts of the signatory countries automatically uphold foreign arbitral awards issued in member countries. In addition to the New York Convention, the United States is a signatory of the Inter American Convention on International Arbitration, to which many Latin American countries are party. The US is also a party to a number of bilateral agreements containing clauses providing for enforcements of arbitral awards. When all else fails, the final step to solve a dispute is litigation.