There is a natural temptation for parties negotiating commercial agreements for their mutual benefit to treat dispute resolution clauses as an afterthought in negotiations. “Cookie-cutter” clauses borrowed from past agreements have been known to appear in significant contracts, without particular consideration for their implications. Doing business with foreign companies raises unique issues for energy companies when it comes to matters of efficient resolution of disputes and the enforcement of contractual obligations.
There are a number of potentially costly pitfalls that can be easily avoided by turning one’s mind to some key considerations at the time international agreements are negotiated. Some notable considerations include the following:
- Arbitration clauses are important for enforcing obligations under international contracts.
There are conventions and treaties in place that facilitate the enforcement and recognition of arbitral awards. Most countries are signatories to the New York Convention, which provides for recognition and enforcement of international arbitral awards. The provisions and processes contemplated in these conventions significantly improve the ability of parties to enforce contractual obligations beyond what might be possible with court judgments.
- The parties’ choice of national (or provincial/state) law to govern the interpretation of the contract does not dictate what law will be applied when it comes to governing the arbitration process and enforcing the contract.
In the context of international commercial agreements, the choice of law that governs the interpretation of the contract must be considered separately from the law that governs the arbitral process and enforcement. Jurisdictions have their own statutes and laws that address matters such as what happens when a dispute arises over the appointment of arbitrators, interim relief, and review and appeal of awards. The law that governs the arbitral process will be the law of the “seat” of the arbitration. The contract should specify a “seat” of the arbitration, ideally a city and a country (e.g., “London, UK” to avoid confusion with London, Ontario, Canada), for the purpose of making an explicit choice of procedural and enforcement law. Typically the designation of a “place of arbitration” is equated with the designation of a “seat.” The “place of arbitration” or “seat” isn’t necessarily synonymous with the venue or hearing locale. An arbitration “seated” in Hong Kong, for instance, can often be physically heard anywhere.
The factors that go into choosing a “seat” should include:
- whether a neutral seat is desired to avoid either side having a “home court” advantage;
- local arbitration laws, and how they are applied by local courts;
- whether the courts of the jurisdiction tend to uphold arbitration awards by refusing to set them aside;
- whether the state is a signatory to potentially relevant international treaties and conventions governing enforcement;
- whether the local courts are unduly interventionist in arbitration processes; and
- the availability of skilled local counsel to deal with any required court proceedings.
- Wherever possible, include all of the relevant parties.
Arbitration proceedings are almost always limited to disputes between the parties to an agreement, with very limited ability to involve non-signatories. This is a critical consideration when dealing with foreign subsidiaries that may or may not have assets to satisfy an arbitral award. If the parent company is a guarantor, then the dispute resolution provisions should potentially contemplate the ability to involve the parent in arbitrations so as to obtain an enforceable award vis a vis the parent as well. It may otherwise be very difficult to join the parent and any arbitral award may end up being meaningless.
- Think about the significance of adopting particular arbitration rules and administrators.
In international arbitration agreements it is common, and desirable in most circumstances, to specify a set of procedural rules for governing arbitrations arising under the agreement. Sometimes parties undertake to draft rules to suit their own purposes, but there are also many different sets of established rules that can be (and frequently are) incorporated by reference. Common choices include the International Chamber of Commerce (ICC) rules, International Centre for Dispute Resolution (ICDR) rules, and the Hong Kong International Arbitration Centre (HKIAC) rules.
The choice of rules matters because, although there tend to be significant similarities among many sets of institutional rules, there can be some important differences that might not be immediately obvious. For instance, some rules specify different and more onerous document disclosure obligations, (a party may care whether it is obligated to produce only documents that it wishes to rely on, as opposed to documents that might be unhelpful to its case). Others have special procedures for expedited arbitrations, interim measures, and the appointment of emergency arbitrators. In a particular case, access to such measures may be very important.
Although there are a few arbitral institutions that provide rules for unadministered or ad hoc arbitrations (e.g. UNCITRAL) the rules of most institutions (such as those identified above) assume that the organization will administer any arbitration under those rules. There is a cost to using these services, but it can bring significant benefits in terms of the efficient conduct of proceedings and avoid trips to court when parties cannot agree on who to appoint as arbitrator(s). The fee structure and the level of administrative involvement also varies from one arbitral institution to another.
- Consider who you want determining your disputes.
Parties have the ability to select their own arbitrator(s), or to agree on a procedure for appointing the arbitrator(s).
It is common for parties to default to a panel of three arbitrators (typically, each party picking one, and those nominees agreeing on the tribunal chair). This can work well in many cases. However, having a panel of three can create issues in terms of cost, timing and scheduling. Agreeing to use a single arbitrator and a method of appointment may be desirable for smaller cases, or even large cases where speed and cost are important considerations.
In terms of selecting the arbitrator(s), it is not generally going to be a good idea to identify a particular individual in a contract because it makes the parties captive to the health and availability of that person. However, it may be important in some cases to specify in the agreement a certain field of expertise or professional qualifications (e.g., lawyer, accountant, engineer, quantity surveyor), or language fluency. This can help to mitigate the potential for avoidable delays and costs. Beware of being too specific about qualifications, though, as each requirement shrinks the talent pool and you may have trouble finding anyone who meets the requirements, and who is also available and without conflicts of interest.
As one would expect, the choices made on the above matters (and other considerations as well) will differ depending on corporate priorities and the dynamics of contractual negotiations. The critical point is that the trade-offs should be understood and considered in the context of the overall commercial agreement. The deal negotiated by the parties will only have teeth if sensible dispute resolution provisions are in place when things go wrong.