With the current growth in Australian agricultural exports, we are seeing an increasing number of disputes between Australian companies exporting commodities and the foreign companies they supply. Disputes have various origins, but often arise where purchasers have entered into contracts at the top of the market, and the market subsequently drops. In such scenarios, purchasers may default on their contracts, with the intention of purchasing the commodity elsewhere at lower prices. These defaults may be one-off occurrences, or they can be wide-spread involving purchasers across a commodity seeking to avoid their contracts.
Whether companies decide to pursue legal proceedings to enforce contractual rights or not, they all want to have the option to do so. Some exporters are willing to renegotiate their contract pricing in light of new market conditions, while others insist on their contractual rights. For many companies, this decision is strategic and depends on the nature of their relationships with their purchasers, and whether it is important to have a reputation in the market for enforcing their contracts.
When considering your options for enforcing legal rights against a foreign contracting party, the starting point is to consider the dispute resolution clause (often a so-called “boiler-plate” clause at the back of the agreement that no one paid any particular attention to at the drafting stage!). Contracts for the sale of commodities across borders typically require disputes to be resolved using international arbitration. International arbitration is the dispute resolution method of choice for international contracts for the key reason that a judgment from an international arbitral tribunal (called an “award”) is enforceable in the courts of 148 countries. By contrast, a judgment debt from an Australian court is meaningless in the courts of most foreign countries (including most of our major trading partners, such as China). Another advantage of international arbitration is that you avoid litigating in the home courts of your contractual counter-party. In many jurisdictions, this would raise concerns about the ability to receive an impartial and timely decision, and the potential home-town advantage of the local party (particularly where the local company has government links).
Disputes are not usually front of mind when negotiating commodities contracts but, from a risk management perspective, it is crucial to have the ability to enforce your rights (if it comes to that). When negotiating cross-border contracts, the two most important issues to consider from an enforcement perspective are:
- ensuring that the entity you are contracting with has assets (and ideally, is a substantial entity which is unlikely to be able to wind up or dissipate its assets in the event it has the prospect of an adverse award against it); and
- agreeing an appropriate approach to international arbitration as the dispute resolution mechanism.
Arbitration: the rules of engagement
When agreeing to have contract disputes resolved by means of international arbitration, there are a range of options – from industry association arbitration (such as under the International Cotton Association, Grains and Feed Trade Association or Federation of Oils, Seeds and Fats Association), to arbitration administered by an arbitration institution (such as the Australian Centre for International Commercial Arbitration, International Chamber of Commerce, London Court of International Arbitration, Singapore International Arbitration Centre etc).
Industry association arbitrations can be a sound option for resolving simple or low value disputes. In particular, many industry association arbitrations have quick and cost effective procedures for small claims (typically less than $25,000) which often provide for document-only arbitrations in order to avoid the delay and expense associated with oral hearings. This can be a real advantage of industry association arbitrations, as the expense and time involved in an arbitration administered by an arbitral institution can be disproportionate where the value in dispute is small.
Another important feature of most industry association arbitration is that they generally provide a mechanism for black listing bad debtors. If an industry association member fails to make payment in satisfaction of an award issued by the association, they can be ‘black listed’ on the industry website or in the industry publication, so that other members are cautioned against doing business with that company. From a commercial perspective, this can be a very useful stick in encouraging compliance with arbitration awards. However, there is always the risk that a company, which has an award issued against it, will wind up in order to avoid paying its debt, and re-incorporate under another name to avoid the negative consequences of being black listed.
In assessing the choice between arbitration under industry association arbitration rules and arbitral institution rules, you should be aware that many industry association rules restrict the involvement of lawyers in the arbitration process. Depending on the type of dispute, this may or may not be an attractive feature. The theory behind this rule is that by limiting legal representation, the dispute will be resolved more efficiently and commercially. However, this limitation on the involvement of lawyers can be a real burden for smaller companies which do not have the in-house resources or expertise to deal with these disputes. In any event, it is worth keeping in mind that most industry association arbitration rules do not prevent companies being advised by lawyers and obtaining their assistance in drafting submissions, even if those lawyers are not formally on the record. Many rules also permit legal advisers to attend the hearing to advise, even if they are not permitted to make oral submissions at the hearing.
Another factor to note is that usually arbitrators appointed in industry arbitrations are non-lawyers. An advantage of this is that these arbitrators are often familiar with the industry practice and terms of trade, however if complex legal issues are involved, the arbitrators may be ill-equipped to resolve the dispute. A common complaint is that in such circumstances, industry arbitrators are prone to ‘split the baby’ and award something to both parties rather than resolving the dispute on its merits. With international trade becoming more complex, this can be a substantial disincentive to engage in industry association arbitration.
In conclusion, arbitration is the most effective method for resolving cross-border disputes. However, given the range of options available, it is advisable to ensure that the procedures you are going to be bound by (in the event of a dispute) pursuant to the arbitration clause in your contract will be best suited to the sorts of disputes that are most likely to flow from your contract.