Dispute Resolution Provisions in International Contracts

Dispute Resolution Provisions

Imagine losing millions of dollars because your contract did not properly specify how to handle a dispute. One of the most crucial, yet often overlooked, aspects of international contract drafting is dispute resolution. This is not a mere formality; it is essential for protecting your business interests.

It is important to use a lawyer familiar with international contracts because international contracts involve complex legal and practical issues that vary significantly across different jurisdictions. An experienced international lawyer can navigate these complexities, ensuring that your contract is robust, enforceable, and tailored to your specific needs and to the specific legal landscape of the countries involved.

Dispute resolution provisions in a contract should not be viewed as inconsequential boilerplate. Failing to implement a clear dispute resolution process, and one that makes sense under the circumstances, can lead to devastating results.

Below, I dive into what should go into this process.

Governing Law

The primary question in dispute resolution is choosing which country’s laws will govern the contract and disputes arising under the contract. All other decisions will flow out of the applicable country’s law. That’s because in most cases, governing law will drive the decision as to the venue to select.

Some key things to think about when selecting governing law are the following:

• Are any or all of the parties located in the target country?
• Will the contract or material parts of the contract be performed in the target country?
• What kind of legal system (common law, civil law, something else) does the target country have?
• What kind of damages and remedies are available in the target country?
• Does the prevailing party in the dispute receive its legal fees in the target country?
• How do the court systems work in the target country?
• Does the target country adhere to the rule of law?

Any halfway decent lawyer will analyze the first two questions, and maybe the third through fifth, in selecting governing law. But many lawyers end their analysis there, failing to consider very real practical issues, like whether a foreign judgment could be enforced in the target country, whether foreigners would be disadvantaged in the target country’s court system, whether the target country is a place where the other party could bribe a judicial officer, and so on.

Consider this practical example: An American company and an Indonesian company choose to resolve disputes through arbitration in Australia, but applying the laws of Indonesia. Chances are the arbitrator would not have a solid grasp of Indonesian law–and may not even have English translations of various applicable laws. This would dramatically increase the costs and time to resolve the arbitration. Yet our international lawyers see things like this all the time.

One of our lawyers loves talking about an international litigation matter he defended between a Canadian and a Russian company that called for the dispute to be resolved via arbitration in Mexico City, in English, under New Jersey law. Each explanation given by the client for each portion of this byzantine dispute resolution clause made some sense, but the overall result was a disaster.

The point is that even before considering things like the location of a dispute or the type of forum, parties need to consider the legal and many practical implications of picking the governing law.

Dispute Resolution Location

After determining the governing law, the next crucial consideration is the location for resolving disputes. The location is often set in the governing law jurisdiction, but not always. Parties to international transactions frequently opt for arbitration or some other form of dispute resolution in a neutral forum, ostensibly to avoid bias in favor of the local party.

Setting neutral jurisdiction X as the dispute resolution local while applying jurisdiction Y’s laws can work well if the judge or arbitrator understands the laws in jurisdiction Y. As noted above, that’s not always the case, and sometimes language, cultural, and other barriers can make understanding a foreign country’s laws very difficult.

Assuming the parties want to stick to resolution in one of their home countries, the key question is which one. The answer depends in large part on the nature of the contract and which party is most likely to breach. For example, if a US company authorizes a Chinese company to make and sell the US company’s products in China, then China is probably the better forum because most of the performance under the contract will take place in China. If the Chinese company breaches the agreement, breaches the agreement’s confidentiality provision, etc., the US company is more likely to get an injunction or similar relief in China, so resolving disputes in China probably makes sense.

[And for a long time, US judgments essentially were unenforceable in China, though that might be changing.]

Governing Language

In most courts around the world, you will not hear English. This might seem obvious, but you’d probably be surprised to hear that many people in the U.S. are surprised by this. Not long ago, an American company called us to help them figure out how to handle a lawsuit in which it had been sued in Korea. When we explained that they would need to retain a Korean lawyer because the proceedings were in English, they were surprised by this because they just assumed the Korean court proceedings would be in English.

The moral of the story here is that unless a party is prepared to litigate in another language, they need to address governing language in their contract. But they also need to understand that regardless of what their contract says, a public court in a jurisdiction could simply refuse to proceed in English. So, for example, though it is relatively easy to arbitrate a matter in Korea in English, the odds of litigating a matter in English in a Korean court are slim to none. That brings me back to the point of selecting the correct governing law and location, and to the next, equally applicable point — arbitration.

Arbitration vs. Court

The decision whether to opt for arbitration or litigation in a court is an immensely important one. Arbitration is generally more expensive (largely because the parties pay the costs of the arbitrator or arbitrators) but usually faster and better at maintaining confidentiality. Court actions are generally cheaper, but more public, and slower. Arbitration awards are typically (but certainly not always) more likely to be enforced in more places than a court judgment.

In drafting international contracts, our lawyers usually weigh the anticipated costs of arbitration or litigation against the overall value of the contract. For lower-value contracts, litigation will usually be the more economical option, especially if potential damages are modest. But if we want the dispute to be costly, so as to decrease the odds of our client being sued — arbitration might be the better choice.

Early Dispute Resolution

International contracts often include tiered dispute resolution clauses, which require negotiation or mediation before parties proceed to arbitration or litigation. Requiring parties to spend some time negotiating face to face or via a neutral mediator can force an early settlement before expensive arbitration or court actions are commenced.

On the other hand, tiered dispute resolution provisions can be used as stalling tactics to merely delay the inevitable. Therefore, our international team generally does not like mandatory negotiation or mediation unless they are narrowly tailored. We have handled too many cases where a defendant uses the contract’s requirement that the parties first spend 30-60 days negotiating and then go through a time consuming and costly mediation JUST to stall.

Our view is that if it makes sense for the parties to a dispute to negotiate or mediate, there is nothing stopping them from agreeing to do so in the midst of their dispute. But a contractual provision that requires them to do so can too often be used just to delay.

If parties want a tiered dispute resolution clause, then the best strategy is to think of ways to make it narrow to avoid stalling tactics. Tight negotiation timelines, carveouts for things like injunctive relief, and pre-selecting a mediation forum to avoid delays about mediator appointment are some of the ways to hedge against gamesmanship with tiered dispute resolution.

Conclusion

Crafting a dispute resolution provision that is appropriate under the circumstances is one of the most important parts of international contract drafting. Failing to consider factors such as governing law, dispute resolution location, governing language, and arbitration vs. litigation can cost an arm and a leg and lead to disastrous outcomes.

Written by Griffen Thorne and originally posted on our China Law Blog.