Our recent experience shows that a surprising number of Australian companies (big and small) are failing to insert arbitration clauses into their contracts when the counter-party does not have a presence in Australia. In most cases, this means that the contract will not be enforceable against the counter-party should they act in breach of it. If your business has not developed a strategy or understanding for using arbitration clauses in contracts with a cross-border element – please continue reading.
How does arbitration help?
Globally, arbitration is the leading form of dispute resolution for contracts between parties based in different jurisdictions. This is because very few courts will enforce overseas court judgments but will enforce international arbitral awards. This is due to the fact that nearly every country in the world has ratified the ‘New York Convention’ which requires implementation of legislation providing for the enforcement of international arbitral awards. The result is that international arbitral awards are enforceable in any country which has implemented the convention to the extent the counter-party has assets in that jurisdiction.
If arbitration is not the dispute resolution process agreed in the contract, the ongoing performance of the contract and the resolution of the dispute regarding that counter-party’s performance effectively relies on the goodwill of the counter-party. Such a scenario often results in a significant financial loss to the Australian business.
Providing for arbitration
There are a number of ‘pro-forma’ arbitration clauses that can be used to adopt arbitration if a dispute arises. There are, however, also a number of important factors to be considered in ensuring the arbitration clause is itself legally enforceable and suits your business needs. These factors vary depending upon the circumstances but commonly include the form of arbitration, the number of arbitrators to be chosen, the location of the arbitration and the rules to be adopted. Accordingly, we recommend obtaining legal review of the arbitration clause prior to agreement of the contract.