While working toward the closing of a transaction that will reward both parties for their mutual performance, there is often a tendency for the parties to believe that future disputes are unlikely to ascend between them or, if they do occur, to believe that they can merely work them out through the form of good business. That would be ideal, but sometimes we find that we do not live in an ideal globe.  As a outcome, the parties often give the dispute resolution clauses in many transaction documents piddling or no consideration. Yet disputes can and exercise arise post-obit signing or endmost and a significant ane could wipe out many of the transaction'south intended benefits.

That is not to say that dispute resolution issues should get the focus of contractual negotiations. However, parties who determine, on the front end stop, how best to resolve potential disputes in the context of the overall deal they strike, either equally an actress benefit or an boosted hazard, may be able to gain a leg upwards on achieving a favorable result in the face of a dispute and may exist able to save substantial time and expense in the process.

Drafting Considerations–Dispute Resolution

Foreign or domestic, a primal starting time step to crafting an advisable dispute resolution mechanism is for the parties to analyze and sympathise the core components of their relationship that might impact the successful resolution of a dispute.  The following list of questions should be asked before deciding on the best type of dispute resolution for a item deal.  Because the answers to these questions will differ with each transaction, so volition the dispute resolution mechanism:

  • Which party is more likely to be the plaintiff and which volition be the defendant?
  • What types of disputes are probable to ascend and are they likely to exist well-nigh non-payment, operation or something more complicated?
  • Who will be holding the money or assets and in what jurisdiction?
  • Is there any primal intellectual property involved in the transaction and, if so, who owns information technology?
  • How difficult will it be to locate/serve the opposing party after the transaction has closed?
  • How difficult will information technology exist to become jurisdiction in the preferred forum?
  • Will discovery exist necessary to prove claims that are more likely to ascend?
  • Is there a likelihood that a dispute may involve more than two parties?
  • Are in that location quality, fairness or other concerns with the local courts in the country where the counterparty is located?
  • Is it likely or desirable that the parties' relationship volition continue subsequently resolution of the dispute?
  • Which party volition exist most concerned virtually the publicity associated with whatsoever disputes?
  • How difficult will it be to accept a foreign land judgment enforced in the countries where enforcement is most likely to occur?
  • Whether a party is meliorate off utilizing a particular class of dispute resolution or resolving the disputes in a particular country volition depend largely on the answers to questions like these.

Dispute Resolution Clauses

In full general, dispute resolution clauses take on a few forms merely practical feel teaches united states of america that no unmarried approach to dispute resolution and no single approach to forum selection will be appropriate for every deal.  If the resolution provision is written to address but 1 party's concerns, it will exist agin to the other party—and therefore a bone of contention in the negotiations.

The kickoff option is substantially "the Ostrich Option", which is to not provide for whatever dispute resolution clause in the transaction understanding. This approach results in the well-nigh uncertainty, leaving either party costless to file a lawsuit in any court information technology believes will exercise jurisdiction. All the same, this approach tin be a strategic fallback when the other political party refuses to include whatsoever dispute resolution clause except for one you simply cannot alive with.

For those parties opting to include a dispute resolution clause in the transaction understanding, the choice mostly comes downwards to litigation or mediation, with various levels of negotiation or mediation oftentimes agreed upon as a preliminary step. The forum for the arbitration or litigation normally volition be the abode country (or state) of either party or a 3rd, neutral land (i.e., home, away or neutral). Litigation in a neutral court is a relatively new concept and is only available in a few jurisdictions, including the United States and England.   It is also a concept that I do not recommend.

In the United States, several states, including New York and Illinois , have passed statutes expressly permitting the selection of their courts for cross-border disputes fifty-fifty if in that location is no other contact with the forum.  Typically, that state'south law must be the governing police for the underlying agreement and a minimum dollar threshold must be met. To date, at that place are very few jurisdictions exterior the United states of america and England that will accept jurisdiction over disputes on this and then-called "neutral basis" every bit well-nigh courts require some level of contact with the forum.  However, in the overall context of Ace transactions, there will be sufficient contact with Illinois as the "habitation land".

Litigation remains the most common dispute resolution mechanism, in function considering unless the parties agree to another approach, they will be forced to litigate their disputes past default. When the parties in fact prefer litigation, the thoughtful drafting of a forum pick clause can provide significant benefits, including the avoidance of expensive and protracted fights over service of process, personal jurisdiction, enforcement and other disquisitional bug. Courts in the Us and in about other industrialized countries typically volition enforce forum option and mediation clauses in accordance with the parties' agreement, although about countries besides crave some level of contact with the selected forum. As mentioned above, jurisdiction for Illinois will be supported past the fact that Ace has its main headquarters in Illinois and is one of the contracting parties.

Many parties opt to require diverse levels of negotiation or mediation prior to resorting to binding arbitration or litigation. These steps can save time and money if both parties are motivated to fully participate and thus tend to exist more than common in long-term relationships like joint ventures or outsourcing transactions, which are presumed at the get-go to be more cooperative in nature.

Litigation vs. Arbitration

Litigation and arbitration each offer definable benefits and risks.

Characteristics of litigation generally include:

  • the correct to an appeal;
  • potentially lengthy delays;
  • relatively low costs to initiate the procedure, but ofttimes significant long-term costs to see information technology through to conclusion;
  • the language of the proceedings (and pleadings) is generally the linguistic communication of the local jurisdiction;
  • various procedural formalities are required to initiate the process including service of process and jurisdiction;
  • established procedures for calculation tertiary parties;
  • the fairness and quality of courts can vary significantly depending on the country or even within a particular land;
  • the process is typically a matter of public record and thus is not by and large confidential;
  • discovery is largely unique to the United States and is generally unavailable in other countries;
  • court rulings in the Usa generally create binding precedent, simply this is generally non the case in other countries; and
  • potential difficulties with enforcing judgments abroad.

Characteristics of a typical international arbitration include:

  • the lack of the right to an entreatment;
  • a flexible procedure that may exist tailored by the parties to best suit their needs (including every bit to the language of the arbitration);
  • a procedure that can be significantly faster than litigation;
  • greater costs to initiate the process compared to litigation, but often lower costs to run across it through to decision;
  • fewer technical procedural requirements are needed to initiate the process (eastward.yard., no service of process or jurisdiction requirements);
  • the ability to select arbitrators with specific qualifications, which may result in a more appropriate or practical resolution;
  •  the same counsel may be used in near every forum;
  • the process is generally confidential;
  • discovery is generally non bachelor unless the parties specifically agree to information technology;
  • awards are frequently easier to enforce abroad than court judgments; and
  • potential difficulties in obtaining emergency relief on an urgent footing.

Some of the drawbacks of litigation tin be addressed in the dispute resolution clause itself. For example, the parties tin can consent expressly to jurisdiction in a particular courtroom and an agent for purposes of accepting service of process. The parties can besides empower the court to award attorney's fees. Language and customs, still, are more difficult to negotiate, every bit courts and third parties volition not feel constrained by provisions of a contract.  As well, no thing how carefully the parties typhoon the clause, goose egg in the understanding can force a court to act more than quickly or enable a judgment to be more than enforceable in some other country.

Arbitration, on the other hand, is extremely flexible in that the parties are generally free to craft about any process they want, including one that balances the parties' competing concerns as to how disputes should be resolved based on experience in their home countries. As such, a cross-border transaction involving parties from different countries presents a compelling argument for arbitration over litigation considering the parties likely come to the table with different rules and expectations for litigation.

Enforcement of Judgments and Awards

One of the almost unique issues in cross-edge disputes relates to the doubtfulness surrounding the enforcement of foreign state judgments or arbitration awards. While parties may more easily appeal a court judgment in the jurisdiction in which it was rendered, some countries will not enforce the judgments of foreign courts, including those of the Usa. Several European conventions exist, including the Brussels and Lugano Conventions, regarding the recognition of courtroom judgments within and among various signatory countries; however, the United States is not a political party to any convention or any other treaty providing for the enforcement of judgments rendered by foreign courts. Withal, the courts of the United States are generally more receptive to the enforcement of foreign court judgments than are the courts of nigh other countries. Accordingly, a US judgment is less likely to be enforced away, while US courts are often more inclined to enforce a judgment rendered by a foreign court.

On the other hand, the United nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to equally the "New York Convention"), which more than 130 countries have signed, including the United States, has made arbitral awards significantly easier to enforce across international borders. Thus, unless enforcement will occur in the aforementioned jurisdiction in which the dispute is decided, a The states plaintiff is typically meliorate off choosing mediation in a cross-edge transaction in guild to increase the likelihood that it will exist able to enforce a determination should the demand arise.

Applied Tip:  In one case a party determines that it is more probable to be the plaintiff in pregnant disputes, information technology might be compelled to require mediation as the machinery for resolving disputes under the transaction agreements in order to increase the chance that an award volition exist enforceable in a strange jurisdiction. A party who is more likely to exist a defendant might press for litigation in order to get in more difficult for the plaintiff to enforce a judgment.

Annotation:  Since no one knows for sure which side of a dispute one will find itself, it is far better exercise to seek the arbitration clause.

This choice should be balanced, however, by a careful consideration of the actual rules in the particular jurisdiction where enforcement will likely need to occur. The most obvious location for enforcement is the place of business organisation of the other party; nonetheless, enforcement can exist sought anywhere that the judgment debtor has assets.

Delays in Justice

Every bit a dominion, plaintiffs, not defendants, are mostly more interested in avoiding delays in resolving disputes. Delays tin bear on the dispute resolution process, including the length of time required for a court or arbitrator to render a judgment or laurels, hear and determine appeals and rule on matters of enforcement. Litigation typically takes longer than arbitration in all iii phases, and these delays are by and large thought to exist a disadvantage for a plaintiff and an advantage for a accused.  There are, however, ways to reduce the delays associated with litigation and arbitration.

In litigation under near judicial systems throughout the world, proper service of process and personal jurisdiction over the parties are unavoidable prerequisites to a court'southward ability to hear a dispute. Without an express clause in the agreement apropos these issues, a party is likely to spend six months or more obtaining service of procedure on a strange party and perhaps another 6 months fighting over whether the chosen court has jurisdiction or is an appropriate forum for the dispute in question. The delays and risks associated with these very provincial litigation bug can be mitigated in a clause where the parties expressly consent to a specific jurisdiction and expressly engage a local agent to accept service of process on a party's behalf.

Practical Tip:  Parties tin and should expressly consent to a specific jurisdiction and appoint a specific local agent to accept process within their contractual agreements.

With arbitration the parties have the ability to potentially create a more efficient resolution process by tailoring the procedures to best fit the transaction and the anticipated disputes. For example, the parties can choose the linguistic communication to be used in the arbitration proceedings, whether the arbitration should continue nether the purview of an administrative organ, whether to appoint arbitrators with specific industry experience, what procedural rules will apply to the conduct of the arbitration, how much discovery is permissible, how quickly an award must be rendered and what damages are bachelor, all within the arbitration clause independent in the transaction understanding. Whether opting for mediation or litigation, the more the parties are able to agree on the procedural aspects during the relatively cooperative period while they are negotiating the transaction agreements, the more time and money they could save in the hereafter should a dispute arise and the human relationship turns contentious. At that point, with the haggling over procedural aspects behind them, the parties will exist able to focus their efforts on resolving the underlying dispute.

Discovery Issues

Discovery is a concept that is largely unique to the The states legal system. Pretrial depositions and very expansive document productions, while common in the U.s., are unavailable in almost every other legal system in the world. U.s.a. discovery is typically one of the almost intrusive, prolonged and expensive phases of a lawsuit, just information technology becomes critically important if proving or defending confronting the potential claims requires data that is uniquely in the possession of some other political party (e.k., proving knowledge of a detail factual circumstance as it may be relevant to a "knowledge" qualifier in a representation contained in the principal transaction agreement).

While Usa courts provide an obvious forum in the effect pre-trial discovery is necessary, the parties are more often than not complimentary to concord on a procedure for discovery in the context of mediation. If the mediation clause is silent equally to discovery, the availability of discovery volition largely depend on the arbitrators' willingness to permit it, which will be greatly influenced by the arbitrators' personal experience. Generally, US arbitrators tend to permit discovery and non-US arbitrators do not.

Practical Tip:  Parties should specifically provide for discovery in the applicable dispute resolution clause, and if and so provided, the arbitrators must allow it.

Dispute Costs

Litigation is often thought to be more expensive than mediation, but exterior the The states where legal systems do not permit discovery or jury trials, the cost to litigate tin be much more in line with the cost to arbitrate. Even if the overall legal expenses are less, no i selecting arbitration should be confused into thinking that arbitration will be cheap.

International mediation has become a highly advanced and sophisticated dispute resolution mechanism and the arbitrators, or i side's counsel, can independently cause fees to increase significantly if, for example, discovery is permitted as function of the mediation. Moreover, certain arbitration organizations charge significant upwardly-front fees and many arbitrators require significant advance payments, which can arrive very costly merely to begin the dispute resolution procedure. While these upwardly-front costs can exist a drawback, they can also provide a strategic benefit to the would-be defendant by deterring the other party from filing some or all of their potential claims.

When evaluating the relative costs of the dispute resolution mechanisms, a party to a cross-border transaction should also consider whether the default rule of the applicable forum is that the loser pays the winner's legal fees or whether each side pays its own fees.

In the arbitration context, the default rules of most international arbitration associations specifically empower the arbitrators to award mediation expenses, including chaser's fees, as office of the final award. By contrast, the general default dominion for arbitrations conducted in accordance with U.s. rules is for each side to be responsible for their own legal fees regardless of who prevails. Similarly, in the litigation context, the general default rule in the Usa is that the parties pay their own legal fees, whereas in Europe the general default rule is that the loser pays. Appropriately, the default rules tin be a pregnant deterrent to a political party's ability to bring a claim.

Practical Tip:  When a party to a contract has good controls in identify for implementing and abiding past contractual terms, it is by far the better exercise to include a provision in the contract requiring the losing side to be responsible for all legal fees.  It acts as a deterrent to parties who may exist inclined to take difficult-line, risky positions.

Confidentiality Concerns

As in the domestic context, some other significant concern for many parties to cross-border transactions is preserving confidentiality, both with respect to the dispute itself and with respect to the components of the underlying transaction. Often the parties will take entered into a confidentiality agreement or volition include a confidentiality clause within the main transaction agreement that prevents the parties from disclosing the transaction and any proprietary data shared in connection with it.

Litigation in the Usa, Europe and Asia is a public process, nonetheless, so these clauses tin lose much if not all of their intended result during the form of litigation. While the parties might be able to preserve the confidentiality of some documents produced during the discovery process, most of the documents volition become publicly available data. The trial itself and the judgment will also typically go a matter of public record.

Arbitration, on the other hand, is generally a individual process and the parties are typically complimentary to concord among themselves to keep documents, the proceedings and the honor confidential. In add-on, the laws governing the arbitration process in many countries, including England, also as the rules of many arbitration organizations, actually crave arbitration hearings to exist kept private unless the parties concord otherwise.  While several laws and arbitration rules require the establishment and the individual arbitrators to maintain confidentiality, very few of these rules provide for similar restrictions on disclosure past the parties to the arbitration.

Practical Tip:  If desired, parties may expressly tailor their arbitration clause to provide for the confidentiality of the arbitration proceeding and everything disclosed in connection with it. Nonetheless, in evaluating whether to expressly provide for this type of confidentiality, the parties should also consider the powerful effect of negative publicity (including the threat of it) as that can sometimes weigh in favor of fugitive confidentiality.

TROs and Other Interim Relief

As in domestic transactions, cross-border transactions often present situations in which one party may crave immediate relief at the outset of a dispute in order to prevent irreparable impairment. This acting relief may take the form of a temporary restraining society or a preliminary injunction and it may be necessary to protect a party'southward intellectual property or to preserve assets, evidence or other rights that are essential to a party's business. The courts of most jurisdictions have well-established procedures to both facilitate the adjudication of requests for interim relief and to impose the necessary relief immediately. However, the parties should consider expressly providing for the right to featherbed whatsoever preliminary requirement to negotiate or seek mediation in the effect emergency relief is necessary.

In arbitration, on the other hand, the matter is significantly more complicated. While many arbitration organizations are starting to adopt rules for granting interim relief, the parties must agree to special procedures and those procedures are not very tested yet. Further, at that place is a delay associated with the option of the arbitrators. If there is no arbitral tribunal in identify at the time a party requires interim relief, that political party may have picayune other recourse than to caput to the courts to seek acting relief, particularly if arbitration on the merits will be practically meaningless absent interim protection.

Certain national arbitration laws besides as the arbitration rules of sure organizations, including the International Middle for Dispute Resolution and the International Chamber of Commerce, expressly provide that a party may go to the local courts to seek interim relief without waiving or otherwise affecting the ongoing obligation to arbitrate. If the applicable arbitration rules do not provide this right, the parties could expressly provide for information technology in their arbitration clause. This is yet another example of why it is of import to empathise the rules selected and the arbitration law of the chosen forum when opting for arbitration in a cross-edge transaction. This consideration is fifty-fifty more disquisitional in the arbitration setting given that the orders of an arbitral tribunal granting interim relief may be difficult to enforce away.

Damages

Another important reason why parties select mediation over litigation, particularly non-United states of america parties, is to avoid the possibility of excessive amercement.  That said, punitive damages, equally well as other undesirable or speculative amercement can be specifically excluded in most dispute resolution clauses, whether litigation or arbitration is the chosen mechanism. While punitive damages are confronting the public policy of most non-Us jurisdictions, some US jurisdictions, including the state of New York, and some arbitral rules, including those of the International Centre for Dispute Resolution, prohibit arbitrators from awarding these types of amercement likewise.

In order to ensure that the arbitrators adhere to any contractual limitations on damages, the parties may expressly state in the arbitration clause that the arbitrators have no authority to render an honour in excess of the limitations provided for in the agreement. This type of express link to the scope of the arbitrator's authority should give the parties stronger grounds for vacating any accolade that is inconsistent with the limitations on liability provisions.

Selection of Law

Unlike than jurisdiction, pick of constabulary allows arbitrators and judges to use one set of laws (eg. Illinois), though the case is existence heard in a unlike jurisdiction (eg. Alabama) altogether.  While pick of law provisions are not always housed in the dispute resolution clause, in practice they are frequently negotiated in connection with the forum selection provision of the dispute resolution clause. Oft, the parties volition trade these 2 terms, with one political party settling for the forum of its choice and the other settling for its desired option of law. In the context of mediation, however, the forum of the arbitration is ofttimes much more valuable than the option of law. This is so because nearly disputes in the transaction setting tend to chronicle to breach of contract claims and contract law is relatively consistent from one country to the next. Truthful, procedural laws and the quality of the courts can vary significantly from land to country. However, the selected forum for mediation will take significant touch on the arbitrator pool, procedures to be practical to the arbitration itself, how much the local courts tin interfere, and the grounds for vacating or appealing an award.

Practical Tip:  If negotiating option of law issues, cull to win the forum rather than the choice of law boxing.  Information technology is favorable in both arbitration and litigation aspects.

Multiple Parties Issues in Cantankerous Edge Disputes

Disputes involving multiple parties are common. A supplier, a contractor and the owner might have related disputes, or the parent and local entities could be involved in a dispute with a third party. Most jurisdictions have procedural rules that govern the involvement of multiple parties in the litigation context. However, since arbitration is governed past contract, it is not as easy to bring in a 3rd party, especially when that 3rd party is not a signatory to the arbitration agreement. The most troubling aspect of the multiple party mediation dilemmas occur when 1 party has an arbitration agreement in its contract with political party A and a unlike mediation provision in its contract with party B. While some courts may order consolidation when the disputes are related, more ofttimes than not, the party will take to arbitrate against A and B separately. Not but could this pb to additional expenses, just it as well raises the risk of inconsistent awards. The solution to this dilemma is to ensure consistency among disputes provisions and to expressly provide for consolidation of arbitrations.

When a cross-border transaction involves multiple parties or multiple agreements, intendance should exist taken to include the same disputes clause in each of the agreements. The post-obit is an example of the type of language that is sometimes included to effectuate consolidation when necessary:

"Mediation proceedings under this agreement may be consolidated with arbitration proceedings pending betwixt other parties if the arbitration proceedings arise from the aforementioned transaction or chronicle to the aforementioned subject thing. Consolidation will exist by an order of the arbitrator in any of the pending cases or, if the arbitrator fails to brand such an social club, the parties may use to whatsoever courtroom of competent jurisdiction for such an order."

Where consolidated arbitration proceedings are a possibility, the parties should as well ensure that the applicable rules address the methodology for the selection of arbitrators or include an express provision to that effect within the agreement. This precaution will prevent the inevitable disharmonize created when one or more than parties feels left out of the arbitrator option process.

Once again, dispute resolution clauses very rarely need to go a central focus in cross-border negotiations, and they seldom need to get complicated or long. However, careful attention to the dispute resolution clause at the drafting and negotiation stage, particularly with respect to the bug of cost, filibuster and the potential bear upon on the intended allocation of risk between the parties, could prove strategically advantageous if and when a dispute does arise.

This document is intended for informational purposes only and is non legal advice or a substitute for consultation with a licensed legal professional in a item case or circumstance.

Kurt M CarlsonKurt M. Carlson  | Creditors' Rights, Insolvency & Bankruptcy Litigation & Resolution

Kurt's practice concentrates on representing creditors, assignees and businesses of all sizes in a variety of ways, including circuitous business organization litigation, workouts, insolvency proceedings, bankruptcy reorganization cases and circuitous settlement negotiations. Kurt has extensive feel in a broad range of quasi-business and legal issues companies must address. If you lot need help with a related matter, contact Kurt.