A Guide to Dispute Resolution Clauses in International Contracts

High-Quality Dispute Resolution Clauses

With sushi restaurants, it’s the yellowfin.

With new houses, it’s the windows.

With international contracts, it’s the dispute resolution provision.

The “it” I am talking about is the easiest, fastest, most accurate way to judge whether something is good or not.

For international contracts, I head straight to the dispute resolution provision. A well-crafted provision is, above all else, unambiguous. If it calls for litigation, it clearly describes where that litigation will take place and which law will apply. It also specifies who will bear the costs and under what circumstances. If it calls for arbitration, it details where the arbitration will occur, the number of arbitrators required, how the arbitrators will be chosen, the language of the proceedings, the rules that will govern the proceedings, and the applicable law. It also clarifies who will pay for what.

The above are the minimum requirements.

The Benefits of Arbitration in International Contracts

The most effective mechanism for resolving cross-border disputes is usually international arbitration. International arbitration can eliminate the home court advantage of parties on either side of a transaction.

Equally important is that arbitration awards issued by an international arbitration tribunal receive worldwide recognition by countries that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a the New York Convention on Enforcement of Arbitral Awards). With 172 countries as signatories, the New York Convention provides a robust framework for enforcing arbitral awards worldwide. Court judgments can be difficult to enforce internationally unless there is a reciprocal enforcement agreement between the countries involved.

When Litigation Might Be Preferable

When dealing with China and some other countries in Asia, there are definitely times when litigation may be preferable to arbitration. In particular, if China IP or trade secret violations are perceived as the biggest threat to a client, it often makes sense to choose a Chinese court as the forum for dispute resolution. Additionally, there are times when making dispute resolution as difficult, as expensive, and as drawn out as possible can dissuade the counterpart from ever engaging in it. In those instances, arbitration may not be the best option.

Choosing Between Arbitration and Litigation

In my law firm, it is common for the lawyer drafting an international contract to convene 3-4 of our lawyers for a 10-15 minute (nonbillable!) strategy session to talk through the dispute resolution provision in the international contract. In that discussion, we all weigh various factors to determine whether to choose arbitration or litigation. Choosing where to have disputes resolved can be incredibly complicated and it can be helpful to get many perspectives, from both international business lawyers and from international litigators.

Every month or so, a lawyer will reach out with a “quick question” about whether a particular court or arbitration body would make the most sense for their contract. I usually respond that to confirm or disagree with their choice, I would need to review the entire contract and know much more information. About half the time, the lawyer responds by asking, “like what?” I usually respond by saying that the international attorneys at my law firm usually like to start with the following:

• Who the parties are.
• Where the parties are located.
• The applicable law.
• The contract language.
• The nature of the contract.
• The client’s goals: Money? IP protection? Something else?
• The likelihood of each party breaching the contract.
• The types of disputes likely to arise.
• The languages spoken by the parties.
• The relative wealth of the parties.
• The need for discovery if a dispute arises.
• The need to involve third parties in any dispute.
• The complexity or simplicity of likely disputes.
• Appeal concerns.
• Confidentiality concerns.
• Concerns regarding the speed of dispute resolution.
• Concerns regarding enforcement of judgments or awards.

The below are some of the things international lawyers typically try to balance in reaching an arbitration versus litigation decision:

1. Jurisdiction and Enforceability

• Arbitration: Arbitration awards are generally easier to enforce internationally due to the New York Convention, which has been signed by 172 countries.
• Litigation: Court judgments can be difficult to enforce internationally unless there is a reciprocal enforcement agreement between the countries involved.

2. Neutrality

• Arbitration: More likely to provide a neutral forum, avoiding potential home court advantages.
• Litigation: Can often be biased towards the home country’s parties, making it less attractive for international disputes.

3. Speed and Cost

• Arbitration: Typically faster than litigation but can be costly due to arbitrator fees and administrative expenses.
• Litigation: Can be slower due to procedural complexities and court backlogs, but court fees are usually lower than arbitration fees.

4. Confidentiality

• Arbitration: Generally confidential, which can be crucial for sensitive business matters.
• Litigation: Court proceedings are usually public, which can lead to unwanted publicity and disclosure of sensitive information.

5. Flexibility

• Arbitration: More flexible in terms of procedures, scheduling, and choice of arbitrators with specific expertise.
• Litigation: Less flexible, bound by procedural rules and court schedules.

6. Decision Maker Expertise

• Arbitration: Parties can choose arbitrators with specific industry expertise.
• Litigation: Judges may not have specialized knowledge relevant to the dispute.

7. Appeal and Review

• Arbitration: Limited grounds for appeal, which provides finality but can be a downside if the decision is unfavorable.
• Litigation: Decisions can be appealed, providing an opportunity for review but also prolonging the resolution process.

8. Legal and Cultural Considerations

• Arbitration: Can accommodate different legal traditions and cultural practices.
• Litigation: Might be influenced by the legal and cultural norms of the jurisdiction where the court is located.

Arbitration Specifics

• Process: Arbitration involves presenting arguments and evidence to a neutral third party (arbitrator or panel of arbitrators) who makes a binding decision.
• Arbitrators: Arbitrators can be lawyers, retired judges, or other experts in the relevant field. The parties typically have a say in selecting the arbitrators.
• Rules: Arbitration proceedings are governed by specific rules set forth by an arbitration institution (International Chamber of Commerce, CEITAC, AAA, etc.) or agreed upon by the parties.
• Award: The arbitrator issues a final and binding award that can be enforced in court if necessary.

Litigation Specifics

• Process: Litigation involves filing a lawsuit in court, presenting arguments and evidence before a judge or jury, and receiving a final judgment.
• Discovery: Discovery is a key part of litigation, allowing each party to gather information from the other side. This can be a lengthy and expensive process.
• Appeals: Parties typically have the right to appeal a court decision to a higher court. Appeals can be lengthy and expensive.

Contracts Do Not Exist in a Vacuum. Context is Everything.

A long time ago, a large manufacturing client contacted me for help with an international product recall. The company’s product had a faulty part from a smaller supplier. I initially thought the client should seek reimbursement from the supplier and its insurance company. However, the supply contract protected the small supplier in every possible respect, which was surprising since big companies typically impose their terms on smaller suppliers.

When I asked why they had allowed such an unfavorable contract, the client explained they had recently started using it with new suppliers, believing it to be well-drafted. It turned out the contract had been drafted by a non-lawyer in supply chain management who copied it from another large company. This “great contract” was, in fact, great for a parts supplier, not for a parts recipient, and my client ended up paying every dollar of the recall.

The Importance of a Well-Drafted Dispute Resolution Clause

Years ago, I was on a seminar panel on How to Write Effective Arbitration Provisions. All of us panelists agreed that “a bad dispute resolution clause is worse than no clause at all.” This is particularly true in China and most of Asia, where courts are more likely to adhere strictly to the contract’s wording, without considering business or legal customs.

My law firm’s international dispute resolution lawyers have noticed a concerning trend with arbitration provisions. Years ago, we often saw poorly drafted arbitration clauses (not created by us). Now, we are seeing clauses that are incredibly bad, likely because many international lawyers in Asia have become exceptionally skilled at crafting them to protect only their own clients’ interests.

Common Problems with Arbitration Clauses

The international lawyers at my law firm are increasingly seeing problematic arbitration provisions in contracts between US companies and their China/Asian manufacturers. Here are some common issues we are seeing.

• Unclear Initial Dispute Resolution Requirements: The agreement requires the parties first try to resolve their differences independently. It is silent on what this means and often mandates a lengthy period (90-180 days) for this process, sometimes requiring in-person discussions in the foreign country.
• Vague Mediation Requirements: If initial discussions fail, the agreement calls for mediation, but it is unclear what constitutes mediation and how to initiate it. Mediation is usually mandated to occur in the foreign country.
• Complicated Arbitration Provisions: If mediation fails, the agreement mandates arbitration before three arbitrators, with no clear guidelines on how to initiate arbitration or which arbitral body will oversee it. Arbitration is typically required to take place in the foreign country and in the foreign language.
• Language Ambiguity: Many agreements are silent on the language of the arbitration proceedings, which defaults to the official language of the country where arbitration is held.

Dispute Resolution Provisions to Avoid: Real Life Examples

Example 1: The Costly Consequence of Poor Drafting

An American company sent me a contract containing all the problematic provisions mentioned above and asked if our dispute resolution lawyers could take on their case. I explained how expensive it would be to navigate the vague dispute resolution provisions, conduct in-person mediation in China, fight over the choice of arbitrators, pay for three arbitrators, and conduct an arbitration in Chinese. The contract also lacked a provision for awarding attorneys’ fees to the prevailing party.

In the end, the American company decided the costs and risks of arbitration were too high and chose not to proceed.

Example 2. The Most Circuitous Dispute Resolution Requirements, EVER

An American company came to me with a signed contract that required several onerous steps for resolving disputes. The contract mandated that the parties first meet twice (at least 60 days apart) in Vietnam to attempt to resolve any disputes. If unresolved, they would then go before a Vietnamese mediator (at least 60 days later). Failing that, they would need to arbitrate, with the American company bearing the full cost of arbitration. Additionally, the arbitration would be appealable to a Vietnamese court. The contract was silent about the language of the mediation, arbitration, and court appeal, but our dispute resolution attorneys believed all proceedings would need to be in Vietnamese.

In the end, the American company accepted a low-ball settlement offer from the Vietnamese company during their first meeting, largely because it did not want to have to jump through all the hoops mandated by its contract.

Example 3: The Non-Existent Arbitration Institute

A good client of ours came to us with a contract calling for arbitration before the “Arbitration Institute of the Geneva Chamber of Commerce.” Our client had taken a contract my law firm had written for them years earlier, made a few changes, and reused it for another transaction. The original contract called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce, a common forum for disputes between Russian and American companies. When our client entered into an agreement with a Spanish company, the Spanish company refused to have disputes resolved in Stockholm. Our client then switched “Geneva” for “Stockholm” and called it a day.

Back then, the Geneva Chamber of Commerce did no arbitration. Zero. When it came time for my client to pursue arbitration, our international arbitration lawyers had to conduct extensive research to determine how to commence arbitration before a non-existent arbitral body. We ended up deciding to file with the Swiss Arbitration Association in Geneva, arguing that this was what the parties had actually intended and that the arbitral body would want to keep the case.

The opposing side vigorously contested our choice of forum. Only after many briefs, much time, and many dollars later did we prevail on this jurisdictional issue. Our client ultimately settled the case for less than they could have (had they had a better arbitration provision) because they (and we) were always concerned that a court might not enforce the award due to questions about the arbitration panel’s jurisdiction.

Example 4. Nonsensical Tokyo Arbitration

An American company learned that its Chinese manufacturer was producing and selling the company’s newest version of its product. The contract stated future iterations belonged to the Chinese company. Additionally, the contract called for disputes to be resolved in “Tokyo Superior Court,” which doesn’t exist and would not have jurisdiction over the matter. This poorly drafted clause created significant legal complications.

Example 5. Nonsensical Toronto Court Jurisdiction

A company came to us with a contract that listed Toronto courts for disputes between its US company and its Chinese counterpart. When I told them that no Canadian court would hear a dispute between a US and a Chinese company that had nothing to do with Canada, they told me that they had chosen Canada based on a China Law Blog post extolling Canada arbitration. They did not realize that one cannot just designate a court for their disputes.

Example 6. South Carolina Arbitration in Chinese Under British Law

A British company came to my law firm with a contract requiring arbitration in South Carolina, in Chinese, under British law. This absurd clause would have incurred exorbitant costs, discouraging the pursuit of arbitration. Such provisions might be strategically used to discourage disputes but are disastrous if you need to sue. Fortunately, this contract had yet to be signed and one of our international transactional lawyers was able to clean it up, using London arbitration, in English, under British law.

Drafting the Arbitration Clause

Be Clear

Clearly state that any dispute will be resolved through arbitration and define whether arbitration is to be preceded by negotiation or mediation. Designate a time frame, e.g., “Any dispute arising out of or relating to this agreement shall be finally resolved by arbitration. If no agreement is reached within __ days of the delivery of written notice of the existence of a dispute, either party may serve a request for arbitration.” I generally advise against including mandatory provisions for settlement talks or mediation because they can easily be used for delay, and if both sides want to engage in settlement talks or mediation, they are free to do so.

Specify the Administering Institution and Rules

Identify the administering institution and the rules to be applied, e.g., ‘The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules.

Carefully Select the Arbitration Site

Choose the arbitration venue based on the quality of its arbitration jurisprudence and its arbitrators and the respect its courts have for the arbitral process. Ensure the location is neutral and convenient for both parties. Arbitration and arbitrator costs can often be an important factor as well. London, New York, Geneva, and Singapore are all great, but expensive. Hong Kong used to be great, but no longer is. For smaller matters, I tend to favor neutral “second-tier” for arbitration cities like Vancouver, Toronto, Madrid, or Mexico City.

Detail the Arbitrator Selection Process

Specify the number of arbitrators on the panel and how they will be selected. Choose arbitrators with proficiency in communication, a firm understanding of the rules of evidence, and expertise in the industry or issues in dispute.

Designate the Language of Proceedings

Clearly state the language in which the arbitration proceedings will be conducted to avoid relying on foreign translators, ensuring clear communication and understanding.

Include a Finality Clause

State that the arbitral award is binding and final, e.g., “The arbitral award is binding, final, not subject to review, and not subject to appeal by the courts in any jurisdiction.” This ensures that the decision is conclusive and reduces the potential for prolonged legal battles.

Allocate Costs and Fees

Clearly outline who will bear the costs of arbitration, including arbitrator fees, administrative expenses, and legal costs, to avoid disputes over expenses.

Consider Confidentiality

Many lawyers assume all arbitrations are confidential, but this is not true in many jurisdictions. If confidentiality is important, explicitly include a confidentiality clause to protect sensitive information disclosed during arbitration, e.g., “The arbitration proceedings and all related documents shall remain confidential and not be disclosed to any third party.”

Outline the Scope of Arbitrable Issues

Define which disputes are subject to arbitration, ensuring that all potential conflicts are covered, e.g., “All disputes, including but not limited to those relating to the interpretation, performance, and termination of this agreement, shall be subject to arbitration.”

Specify Interim Relief Measures

Allow for interim measures or preliminary relief to protect assets or maintain the status quo pending the final arbitration award, e.g., “Either party may seek interim relief from a competent court to preserve its rights or property pending the arbitration.” But be careful, because some countries do not like these provisions.

Strategic Flexibility in Drafting Arbitration Clauses

It is essential to recognize that  it may make strategic sense not to include certain provisions, or to draft them in a way that serves your own specific strategic goals. For example:

• Omitting Confidentiality: In some cases, it might be beneficial to keep the arbitration process public to pressure the other party.
• Deliberately Complex Procedures: Making the arbitration process complex and expensive may dissuade the other party from initiating arbitration, which could be beneficial if you are the party most likely to be sued.
• Choosing Arbitration Location: Selecting a location that is more favorable to your interests or less convenient for the other party can also be a strategic move. It is important to be flexible and creative here. I am always surprised with how often we can get Asian companies to agree on Vancouver, Canada on transactions involving West Coast clients and I think that is because they expect us to pitch New York City.

Key Takeaways for Effective Arbitration Clauses

Well-crafted dispute resolution clauses are essential for international contracts. Remember these key takeaways:

• Clarity is King: Ensure your arbitration clause is unambiguous and clearly outlines the process for resolving disputes.
• Choose Your Battlefield Wisely: Select a neutral arbitration venue with a strong track record in international arbitration and convenient for both parties.
• Don’t Leave It to Chance: Specify the arbitration rules, language, and number of arbitrators to avoid confusion and delays.
• Consider Strategic Advantages: In some cases, complex procedures or a specific location choice might be a strategic benefit.
• Protect Your Interests: Include confidentiality clauses, allocation of costs provisions, and a clear scope of arbitrable issues.