Trans-Jurisdictional Transactions

In this article, we discuss critical drafting considerations to include in cross-border dispute resolution clauses. We focus on arbitration clauses, and identify essential provisions and those which are recommended based upon the specific nature of the transaction.

Types of Dispute Resolution

There are many different forms of dispute resolution processes, including formal court proceedings, non-binding mediation, private and binding arbitration, and informal settlement discussions. The only consensus regarding dispute resolution is that most companies abhor the thought of litigation, particularly litigation in a foreign locale, as it is universally expensive, time-consuming and a drain on resources.

In stark contrast to formal litigation, arbitration provides the binding results of litigation, but with a degree of reliability not available in a courtroom setting. Arbitration allows the contracting parties the flexibility to mutually agree on the particulars of the dispute resolution process. For these reasons, most businesses today embrace binding arbitration as the optimal choice for formal dispute resolution.

Initial Decisions and Considerations

When considering the dispute resolution provision, the parties must first decide what resolution actions may be taken before arbitration is initiated. Given the range of resolution options, many contracting parties opt for a “stepped” approach: First, the executives of the parties will attempt to informally resolve an issue (usually through a required “cure” provision), then move on to formal mediation, and if the dispute is still not resolved, to binding arbitration. Such steps, with strict time limits to avoid endless process, must be drafted into the dispute resolution provisions.

The next decision for the parties is the r'gime to administer the arbitration. Some of the most commonly used international arbitration r'gimes are the International Chamber of Commerce (ICC), the International Centre for Dispute Resolution (ICDR), the London Court of International Arbitration (LCIA), and JAMS International. Each administrator has its own set of rules which will provide the procedural structure for the dispute resolution process. Parties to a cross-border transaction should examine these various procedural rules to determine what works best for their particular circumstances.

Beware the 'Model Clause'

Once an arbitration r'gime has been selected, most experts recommend inserting the “model clause” for that r'gime into the dispute resolution provision. Websites for the respective r'gimes provide basic, standard arbitration clauses to incorporate into agreements to proceed under their respective rules. While these clauses provide the parties the bare minimum of what they need to compel arbitration, they lack many benefits available to the parties who choose to avail themselves of the arbitral process. Put another way, the clauses provide the model but don't provide the clothes. There are many additional components that should be included to put a good set of clothes on the model.

Effective Dispute-Resolution Provisions

Broad, Mandatory, and Binding

The best drafted resolution provision will be completely ineffective if it does not apply to the dispute. For example, if an international distribution agreement references price lists that will be “separately determined,” would a dispute over such prices be subject to a provision calling for arbitration of “all disputes arising out of this distribution agreement”? Arguably, the price list is a separate matter. To avoid future disagreements over the reach of the arbitration provision, drafters are urged to make the scope of the arbitration clause as broad as possible. Instead of simple statements calling for arbitration of “all disputes,” an effective dispute resolution provision will call for arbitration of “any issue, question, dispute, claim or controversy arising out of or in any way relating to this agreement,” and further include, “the scope or applicability of this agreement to arbitrate[.]“

Well-crafted provisions should also make arbitration mandatory, binding, and final. Drafters should only use phrases such as “shall be determined by binding arbitration,” and should avoid using permissive, non-binding language such as “may be determined by arbitration.” Reinforcing the finality of the arbitrator's decision further stifles future attacks on the enforceability of the award. This may be accomplished with simple, declarative phrases such as “The decision of the arbitrator will be final and binding upon the parties.”

Time, Manner, Place

Basic decisions regarding the timing, mechanics, and location of arbitration can have far-reaching effects, yet are frequently overlooked. While default logistics are typically included in the r'gime's procedural rules, the parties may modify these arrangements.

First, the arbitral process can be limited in time. For example, the formal arbitration proceeding can be set to begin in a specific time frame, such as 60 days following a written notice invoking arbitration; this limits the cost and burden of preparing for the proceeding. Likewise, the scope of discovery may be specified in the arbitration clause, as can the manner in which the arbitrator receives evidence, e.g. , in person, by video, or only through documents and/or affidavits. The proceeding itself can be time-limited, with each side having a predetermined number of hours or days to present its case. The parties may also agree upon how much time the arbitrator may have to render its decision, and the degree of specificity of the award itself.

The question of who decides the dispute is of obvious import. The parties must decide and set forth the manner in which the arbitrators are selected, the number of arbitrators to decide the dispute, and perhaps more importantly, the qualifications required of such arbitrator(s).

When selecting arbitrators, the choices are virtually limitless. The parties may mutually agree on a single person or a panel of three arbitrators; in such a panel, the parties may each choose one individual and allow those two arbitrators to select the third. A well-drafted arbitration provision will also define the qualifications of the person deciding the dispute. For example, many arbitration clauses call for “former or retired judges” or individuals with a minimum number of years of applicable experience in the transactional field. In other words, if a construction agreement is in dispute, the parties may agree that the arbitrator must be a lawyer engaged in the practice of construction law. Ultimately, the selection of the arbitrators, in terms of numbers and qualifications, should be carefully considered based on the nature and value of the contract or transaction.

In cross-border agreements, it is also critical to specify the language of the arbitration proceedings and the arbitration award. Parties should consider translation costs, the pool of available, language-qualified arbitrators, and whether attorneys (or additional attorneys) with specified language skills will be required. Such expenses can greatly increase the overall costs of arbitration.

Finally, the place (or “seat”) of the arbitration is critically important. While many parties focus on practical matters such as proximity to the parties and witnesses, or cultural issues, the locale of the arbitration ultimately should be decided on far more important considerations. As a general rule, the seat of arbitration should be in a jurisdiction that is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the “New York Convention”). Under the New York Convention, if an arbitration award is issued in any country that is a party to the Convention, every other party to the Convention is legally obligated to enforce the award.

Once the parties have identified a location, they should also consider whether the selected country has laws that permit and support arbitration. Parties should also ensure that the local courts will timely and effectively support and enforce the arbitral process and its determinations. For example, Miami has quickly become a favorite arbitral locale for parties engaged in cross-border transactions because Florida law openly welcomes the process and ensures lawful arbitration provisions are enforced. The Florida legislature recently passed the Florida International Commercial Arbitration Act (FICAA), which allows foreign entities to arbitrate matters in the Sunshine State regardless of whether the transaction itself involves Florida. FICAA was followed by the implementation of the International Commercial Arbitration Court (ICAC), a special, state court situated in Miami staffed with specially trained judges and armed with progressive, business-effective rules to compel international arbitration and promptly confirm an award.

Governing Law

Another contract provision often overlooked is the choice of law applied to enforce the agreement. The “substantive law” of the agreement should clearly indicate that the law also applies to dispute resolution. This will ensure that the parties have a single law under which to evaluate their disputes, regardless of where the dispute arises, so that the parties will enhance the predictability of the outcome.

Additional Drafting Considerations

The list of additional clauses that can be woven into an effective dispute resolution provision is confined by the imagination of the parties, and driven by the particular needs of the parties and the transaction.

The parties may define the parameters of confidentiality and privilege. This issue becomes particularly acute when the laws of privilege differ between the parties' respective countries. The parties may further agree on which currency(ies) may be used to satisfy an award. They should likewise decide whether the arbitrator has the power to issue interim measures, and if so, under what conditions. Additionally, they may agree on who pays for the proceedings, whether to include a “prevailing party” attorneys' fees provision, and whether pre-award interest should be a compensable and if so, the rate of interest. The parties may agree to preclude any form of class action to arise from a dispute under their agreement. Finally, most arbitral regimes now have rules and procedures in place to allow for appeals of awards, and if appellate relief is welcome, a whole new checklist of options should be considered for the arbitral appellate process.

Conclusion

When contemplating all of the decisions and options available for dispute resolution, one can easily see why parties in cross-border transactions may give short shrift to these provisions. However, when it comes to preserving the consideration and overall value of the transaction, the dispute resolution provision can be as important as the other fundamental deal points. A well-crafted clause diminishes uncertainty from the process and allows parties to better plan their business and legal strategies. Effective dispute resolution planning, beginning with effective drafting, leads to a more advanced, better prepared risk management strategy.

Allan A. Joseph and Stephen H. Wagner are attorneys with Fuerst Ittleman David & Joseph, PL. They may be reached at [email protected] and [email protected].