In today’s global marketplace, unpaid invoices are a persistent headache for businesses trading across borders. When a foreign customer fails to pay, as often occurs in practice, the risks multiply: unfamiliar legal systems, language barriers, and the challenge of enforcing judgments abroad. International arbitration has emerged as a preferred solution for resolving these disputes, offering neutrality, enforceability, and procedural flexibility. But is arbitration really worth the time and cost for recovering unpaid invoices? We will explore real-world cases, common legal hurdles, and practical strategies to help businesses make the right decision.
Unpaid invoice disputes arise in every sector, from commodities and manufacturing to services and technology. Not all cases involve small amounts.
For instance, SGS Société Générale de Surveillance S.A. v. The Republic of Paraguay, ICSID Case No. ARB/07/29 was an investment arbitration where SGS, a Swiss inspection company, provided services to Paraguay and issued invoices, some of which went unpaid, totalling over USD 39 million. The tribunal found Paraguay in breach of contract and the relevant investment treaty, awarding SGS the unpaid sums plus interest. The tribunal emphasised the importance of clear evidence of services rendered and invoices issued, and rejected defences based on delay or lack of prejudice.
In Gate Gourmet Korea v. Asiana Airlines, an ICC arbitration, Gate Gourmet Korea supplied catering services to Asiana Airlines, which failed to pay multiple invoices. The tribunal found Asiana liable for the full amount, awarding approximately KRW 35.8 billion plus contractual interest.
Elements of a Successful Claim for Unpaid Invoices
To succeed in a claim for unpaid invoices, a claimant must usually establish three elements: (a) the existence of a contractual obligation to pay, (b) a breach through non-payment, and (c) a resulting loss, typically equal to the value of the unpaid invoices. Such claims are among the most straightforward disputes in international arbitration, provided that the amounts owed have been clearly documented and accurately calculated.
The burden of proof lies with the claimant, typically on a balance of probabilities. Clear documentary evidence, such as contracts, invoices, delivery receipts, and correspondence, is essential. Documentary records are more persuasive than witness testimony, which serves only a supplementary role in international arbitration. Tribunals may also draw adverse inferences from a party’s failure to produce relevant documents or participate in proceedings.
Strategically, parties should begin collecting and organising evidence as early as possible. In many cases, simply initiating arbitration proceedings can act as a powerful form of pressure: when faced with the prospect of significant arbitration costs and a potential adverse costs award, rational respondents often choose to settle or simply pay the outstanding amounts. Arbitral tribunals frequently order the losing party to reimburse the prevailing party’s reasonable legal costs, which can substantially increase the financial burden on a losing respondent.
Common Defences to Unpaid Invoices Claims
Common defences to claims for unpaid invoices include:
- Set-off and Defective Performance: Respondents may claim set-off for counterclaims or allege defective performance. Tribunals scrutinise such defences, requiring substantiation with evidence.
- Force Majeure and Impossibility: Respondents may invoke force majeure or frustration, arguing that unforeseeable events prevented payment. The tribunal assesses whether the event meets the contractual or legal definition and whether it rendered performance impossible or merely more onerous.
- Procedural Objections: These include challenges to jurisdiction or alleged non-compliance with agreed pre-conditions to arbitration (such as mediation or amicable settlement). Proceedings may be bifurcated in order to deal with procedural objections.
The applicable law is usually determined by the contract. If not specified, it may default to the law of the arbitral seat or the jurisdiction most closely connected to the dispute. This affects how invoices, interest, and potential defences are assessed.
Is Arbitration Worth the Time and Cost?
Cost Structure and Duration
The main cost in arbitration is normally legal representation, not arbitral or institutional fees. The number of arbitrators (one vs. three) significantly impacts costs, however, with three-arbitrator panels being more expensive.
If the anticipated costs of arbitration exceed the value of the unpaid invoices, pursuing arbitration may initially seem unjustified. However, this is not always the case. In straightforward matters where the claimant’s position is strong, arbitration costs can often be recovered from the losing party. If the respondent possesses assets and is not undergoing liquidation, initiating arbitration can still make commercial sense, even for relatively modest amounts in dispute, since a favourable award may ultimately shift the burden of costs to the other party.
Timeframes
Expedited arbitrations can be resolved in as little as 6 months, while standard arbitrations typically take 7–10 months for a sole arbitrator and up to 10–20 months for a three-member tribunal. By contrast, litigation, especially cross-border, can take several years or more when there are appeals.
Enforceability and Recovery
Arbitral awards are generally easier to enforce internationally than court judgments, thanks to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is recognised in over 170 jurisdictions. This greatly increases the likelihood of recovery, especially when the debtor’s assets are located abroad or in multiple jurisdictions.
Confidentiality
Unlike court litigation, which is generally public, international arbitration is often conducted in private and subject to confidentiality obligations. This means that the proceedings, filings, evidence, and arbitral awards are not publicly disclosed unless the parties agree otherwise or disclosure is required by law or enforcement proceedings.
Confidentiality protects commercially sensitive information, trade secrets, and reputational interests, which can be particularly valuable in ongoing business relationships. Most leading arbitral institutions impose express confidentiality obligations on the parties, the tribunal and the institution itself.
Bottom Line
Arbitration is generally efficient for cross-border unpaid invoice disputes, especially where enforceability is critical. Litigation is often slower and less effective internationally.
Best Practices
- Draft Clear Arbitration Clauses: Use model clauses from reputable institutions, like the ICC, specifying the seat, language and number of arbitrators, and ensure the clause covers all disputes arising out of or in connection with the contract.
- Opt for Expedited Procedures: For straightforward contracts, choose expedited arbitration or a sole arbitrator to reduce costs and time.
- Control Costs: Limit document production, use summary procedures for manifestly unmeritorious claims, and consider cost allocation provisions in the arbitration clause.
- Prepare the Evidence: Maintain thorough records of contracts, delivery/performance (or lack thereof) and communications. Tribunals require clear proof of performance and non-payment.
- Choose the Right Seat: Select a seat in a jurisdiction that has a pro-arbitration legal framework, such as London, Paris or Geneva.
- Engage Experienced Counsel: Arbitrator and counsel expertise can make a significant difference in efficiency and outcome.
Conclusion
International arbitration offers a powerful, enforceable and efficient route for recovering unpaid invoices, especially in cross-border scenarios where litigation may falter. The key is to approach arbitration strategically: draft robust contracts, gather evidence, and manage costs proactively.
