Legalese – Dispute Resolution in international transactions

Published: 26/01/08

Dispute resolution provisions are often an after-thought in the negotiation of agreements. However, a well considered dispute resolution mechanism, taking into account all the circumstances of the parties, transaction and relevant agreements can save the parties considerable time and cost if a dispute arises.
There are four principal dispute resolution methods generally employed by parties to agreements:

  • court jurisdiction (i.e. resolution through the courts in a articular jurisdiction);
  • arbitration (institutional or ad hoc);
  • expert determination; and alternative dispute resolution (“ADR”).

While the quickest (and quite often the cheapest) mechanism for dispute resolution is through “home court” litigation, in international transactions the submission to a foreign court is not often likely to be accepted by either party. As such, arbitration is often preferred as it provides a final and binding resolution but also allows the parties to rely on a mutually acceptable “neutral” process. Alternatively, use of an expert may be the most appropriate method where a decision is required quickly and a dispute is technical in nature (for example, in construction contracts). ADR, on the other hand, is a flexible option as it not restricted by formal proceedings of the courts and arbitration. These mechanisms can be combined in a contractual dispute escalation clause so that if a dispute cannot be resolved between the parties first (for example, through senior management and ADR), it is referred to the next level (arbitration or litigation).

Each of these dispute resolution methods is now considered.

Court Jurisdiction
Resolution of disputes through the courts can be quick and inexpensive. Summary judgment procedures are usually available in court and if there are no enforcement issues (see below), a court jurisdiction clause can provide the best option.
It is important, however, before settling on court jurisdiction as the preferred resolution mechanism, that the relevant parties consider where the respective assets of the counterparties are: potentially a judgment made in one country may not be able to be enforced in the jurisdiction where the counterparties assets are (compare the enforcement benefits of arbitration below). As an example, the US has not ratified any international treaties which would otherwise allow judgments of foreign courts to be enforced in the US.
Aside from the enforcement issues, there are other reasons why court litigation may not be preferred:

  • unlike arbitration where parties can contract to appoint arbitrators who have expertise on the matters at hand, complex issues may require an expert tribunal;
  • neutrality: in multi-jurisdictional agreements, it is unlikely that one party will agree to have disputes resolved in another country;
  • and courts are public forums and therefore parties do not have the confidentiality that can be offered in arbitration or ADR.

One of the principal advantages of arbitration (over court jurisdiction) is the neutrality it offers the parties; they can contract to seat the arbitration in a non-party country. However, certainly the most important advantage of arbitration is the enforceability of an arbitral award. An arbitral decision in any country which has ratified the New York Convention 1958 (there are over 130 Convention states) is automatically enforceable in another such state. There is no requirement to re-examine the merits of the case. Other advantages of arbitration include:

  • finality (arbitral award cannot be appealed – although quite clearly this may also be a disadvantage in certain circumstances);
  • confidentiality; and
  • parties can contract to appoint arbitrators who have necessary experience in relation to the matters being disputed.

Naturally, there are certain disadvantages associated with arbitration:

  • there are limitation to the remedies that can be offered by arbitrator, for example, arbitrators cannot make order to bind third parties;
  • court proceedings allow consolidation of multiparty disputes – this cannot be ordered in arbitration, quite often making them unwieldy where there are many parties to the dispute;
  • often the cost and speed of arbitration is greater than court proceedings (depending on the value of the dispute); and
  • ensuring consistency is problematic as one decision does not necessarily bind parties in related transactions.

Parties generally have two choices of arbitration rules: institutional rules (e.g. ICC or LCIA rules) and ad hoc rules (e.g. UNCITRAL arbitration rules). While institutional arbitration, with its more formal administrative procedures generally ensures that the process runs effectively, it can be more expensive. color palette . Ad hoc arbitrations rely on the tribunal and the parties to manage the case.

There are a number of factors to consider when choosing the place of the arbitration. Along with the obvious factors such as convenience for the parties, they should also consider the application of local arbitration laws on the arbitration process: for example, the extent to which local courts will interfere and whether it is possible for an award to be appealed.

Expert Determination
Expert procedures are typically relied on where the dispute is likely to be technical in nature. As expert determination can be quick, it is particularly useful where time sensitive issues (such as the valuation of an asset) are important. There are a number of other benefits of an expert, in particular, the parties can contract to provide that the expert’s decision is final and so, unlike court jurisdiction, finality can be offered in the first instance. Further, parties can also specify that the expert shall have experience in the issues in dispute.
However, enforceability of expert determination can be a problem. As the expert dispute resolution procedures are contractual in nature, the parties ultimately need to rely on the courts to enforce the provisions if a party does not comply with the terms of the agreement.

Alternative Dispute Resolution
There are a number of forms of ADR including mediation, expert opinion and negotiation. Although ADR relies on the parties having a genuine willingness to resolve any dispute, it can offer a range of different remedies to a dispute which are not necessarily available in the more formal proceedings of court or arbitration. ADR is not, however, a binding adjudicative procedure. Ultimately, if ADR is not successful because the parties are unable to agree on a solution, the parties need to provide in an agreement how the dispute will be finally resolved (i.e. through the courts or arbitration).

Dispute resolution methods should be given due consideration when negotiating cross-jurisdictional agreements. Having considered the circumstances in which a dispute may arise and the parties that may be involved in a dispute, an unequivocal choice of dispute resolution process must be chosen. Parties should avoid “mixed provisions” which, for example, provide for both arbitration and litigation (although clearly parties do often begin with non-binding adjudicative procedures and escalating to arbitration or court). If arbitration is the preferred option, provisions shouldn’t mix arbitration procedures such as providing for arbitrators from one country to be appointed in accordance with the arbitration procedures of another.

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