This is the second in a series of bulletins highlighting practical strategies for dealing with common issues in international business transactions and disputes. This bulletin is about choice of contractual dispute resolution mechanism – another key risk management tool.
The Key Message Here?
In the contract governing the international relationship or transaction choose a dispute resolution mechanism. That’s it. Just choose a dispute resolution mechanism.
Because the default dispute resolution mechanism in any country in which you’d want to be doing business is litigation. That means that if you don’t choose some other mechanism, you are, by default, choosing to resolve all disputes arising out of your international business transaction by litigation. There’s usually a better mechanism available.
It’s actually worse than that, because you’re not just choosing to resolve all disputes by litigation. You’re choosing to do so in any jurisdiction in which any party to the dispute can persuade the local court to exercise jurisdiction over the dispute. That’s probably a risk you don’t want to run. Think about where you do business for a minute. Do you want to resolve disputes arising out of that business in those local courts?
What Are The Alternatives?
International commercial arbitration is one. There are some strongly held views about arbitration. Perhaps they’re best summarized by saying that arbitration seems to be preferable to litigation in theory, but in practice it sometimes turns out to be worse. In my experience, as counsel and arbitrator, arbitration has significant potential advantages over litigation: confidentiality, customizable procedure and so cost effectiveness, access to experienced decision makers with specific expertise if desired, and ease of enforcement of the resulting awards, to name some. The key thing to understand is that those benefits are all potential. They don’t just drop into your lap when you include the magic word “arbitration” in your contract. You have to work for them. To realize them you need specialized arbitration expertise, in your counsel, drafting the arbitration agreement and conducting the arbitration, and in your arbitrator. But, with that expertise, it can indeed be done.
Litigation is rarely the best dispute resolution option. But if that is your choice, the next key message is to choose an exclusivejurisdiction in which to litigate. Again, if you don’t choose some jurisdiction you are, by default, choosing to litigate anywhere in the world any party can persuade the local court to exercise jurisdiction. But just choosing a non-exclusive jurisdiction doesn’t eliminate that risk. All that means is that you can’t complain if you’re sued in the chosen jurisdiction and the other party can’t complain if you sue them there. It doesn’t prevent either of you trying to sue somewhere else. You still have that uncertainty. If you choose an exclusive jurisdiction, you know where you’re going to sue and be sued. That uncertainty is resolved, that risk managed.
A Couple of Closing Points
Just choose one dispute resolution mechanism. It’s not uncommon to see sophisticated contracts which provide that all disputes arising under them will be resolved by both arbitration and (often in the “boilerplate”) litigation. That’s not a choice of dispute resolution mechanism. That’s a choice to spend a year or two litigating (in public) what the required dispute resolution mechanism is, before getting to the merits of the dispute. (There may be exceptions to this point, where you want to choose different dispute resolution mechanisms for different kinds of disputes arising under the same contract. That can be done, with care.)
It’s common for relationships or transactions to be governed by more than one contract. If so, choose the same dispute resolution mechanism for all of them. (Again, there may be exceptions, drafted with care.)
Paying attention to these basic practical points can go a long way to managing the risk of international business transactions, by reducing the uncertainty about how disputes arising in them will be resolved.