How to Write a Bad International Arbitration Clause

Yesterday, I attended a fantastic webinar on alternative dispute resolution. Its focus was on arbitration and mediation in Latin America, but pretty much all of what was said applies worldwide. I wrote down one thing said at the event, thinking I would use it for a blog post and today I am. That one thing was the following: “A bad dispute resolution clause is way worse than no clause at all.”

This is absolutely true and not just for dispute resolution clauses; this is true of pretty much any contract provision. This is even more true for China and most of Asia because, unlike the courts in much of the West, most courts in Asia tend to look just at the contract and are not likely to interpret them using business and legal custom/practices.

Our international dispute resolution lawyers are detecting a trend with arbitration provisions. Years ago we talked of how most of the arbitration clauses we were seeing (not drafted by us) were bad.

Now most of them are incredibly bad, because so many international lawyers in Asia have gotten incredibly good at writing them to protect their own clients.

We are more and more often seeing the following as the arbitration provision in contracts between US companies and their China/Asian manufacturers:

1. The agreement requires the parties first try to resolve their differences on their own. It is silent on what this means. Even worse, it sometimes requires the parties spend anywhere from 90 to 180 days doing this. Some even require these discussions be in person in China or Vietnam or Thailand or wherever the foreign company is located.

2. The agreement requires that if the parties are unable to resolve their differences on their own, they then mediate. It is completely silent on what constitutes mediation and what the party seeking mediation should do to accomplish it. They do usually say that mediation must be in China or Vietnam or Thailand or wherever the foreign company is located.

3. If mediation fails, they then arbitrate before three arbitrators, with each party choosing one arbitrator and then those two arbitrators choosing the third. Again, completely silent on how to initiate arbitration or before what arbitral body, though they virtually also state that the arbitration will be in the foreign country and in the foreign language.

4. They are completely silent on the language of the arbitration proceedings. In virtually every country in Asia, this means the arbitration proceedings will be in the country’s official language.

An American company sent me a contract containing pretty much all of the provisions set out above and asked whether the dispute resolution lawyers at my law firm might be interested in taking on their case. My answer was, “yes of course”, and then I proceeded to talk about how expensive it would be to 1.) Sort through and fight the other side regarding all of the vagaries in the dispute resolution provisions, 2.) Set up and go through and in-person mediation in China, 3.) Fight over the choice of arbitrators, 4.) Pay for three arbitrators, 5.) Conduct an arbitration in Chinese when about half the relevant documents were in English and most of our key witnesses spoke no Chinese. I then noted how the contract also did not contain a provision saying that the prevailing party would be entitled to its attorneys’ fees, so it almost certainly would not be.

In the end, we together decided that the costs of the arbitration made bringing it too risky and the American company chose not to proceed. They then asked me if I thought this result was intended all along by their Chinese counterpart and I said, “yes, of course.”

The key thing you must know about any dispute resolution clause is that it needs to be written to protect you, not the other side. So a dispute resolution clause that makes arbitration incredibly expensive is going to protect the party most likely to be sued and harm the party most likely to need to sue. By way of an example, on the manufacturing side, the party most likely to be sued is the Asian manufacturer, not the foreign buyer.

But sometimes, it will make sense for you to deliberately have a convoluted dispute resolution clause that intentionally makes for an extremely expensive dispute resolution process. Just a few months ago, we handled an arbitration brought by a Chinese company against an American client of ours, involving the Beijing Olympics. The Chinese company threatened us with arbitration for well over a year and then it finally paid a good chunk of money to bring it, expecting us to clamor to settle. But when we went on the offensive by, among other things, seeking to take advantage of every ambiguity in the arbitration provision, the Chinese company simply dismissed its case, realizing that the costs/risks of proceeding were likely higher than its upsides.

We are right now representing a country (yes, a country, not a company) against whom an arbitration was filed in New York City for tens of millions of dollars. We immediately filed a motion with the state court in New York, arguing that the arbitration clause is invalid and we will likely be fighting on this issue for many months.

Bottom Line: Your dispute resolution (mediation/arbitration/litigation) provisions really matter and so you must get them right.

For more on China/international arbitrations, check out the following: