The Quarterback Law guide to getting international deals done: Dispute Resolution and Governing Laws
Quarterback Law advises clients on getting international commercial deals done. In this guide, we consider some of the major stumbling blocks to international business, and give practical, experienced solutions to common problems. In-house lawyers need to make quick decisions based on experience and practicality when negotiating a contract. This article is designed to help commercial teams and their in-house lawyers with some of the practical considerations when agreeing to the dispute resolution mechanisms of a contract.
Topic 1 – governing laws and dispute resolution
Usually, the governing law and dispute resolution mechanism is the last thing that clients consider when negotiating their international contracts. We spend more time negotiating liability, IP, warranties, and the indemnities, but we forget about the country and justice system where all this will be enforced. Consider early where, and how, your contract will be enforced. You could save yourself a lot of time and resources towards the end of contract negotiations or in the unfortunate case of a dispute.
Governing Law: This is the law that will govern the relationship between the parties. Contract law can have slight differences between countries, so the parties need to decide which country’s laws their contract will be governed by. We most frequently see the laws of England, the various states of USA, Singapore, China, various states of Australia (but usually New South Wales) and occasionally Ontario (Canada). Most lawyers, particularly in-house lawyers who might be advising on a contract, prefer to stay away from having their contracts governed by laws of countries where they aren’t familiar with the legal systems. Occasionally I’ve had to engage a lawyer in those countries to advise on whether a contract would be enforceable
Dispute resolution:This is agreeing up front on how a dispute will be settled. Parties may agree to submit to the jurisdiction of a particular court system (for example the courts of England & Wales), or to an arbitration institution, such as the Singapore International Arbitration Centre (SIAC) or International Chamber of Commerce (ICC). The location of the dispute resolution does not necessarily have to be the same as the governing laws of the contract, so it is possible, and indeed common, to have SIAC arbitrating a contract that is governed by a law other than Singapore.
Good lawyers will advise their clients to consider many factors in their governing law and arbitration clauses. Consider:
Where the parties are located;
The nature of today’s international trade and commerce is that parties to an agreement can be located at opposite ends of the earth. Thanks to the New York Convention, an arbitral award is generally easier to enforce in a local court than a foreign court judgement (provided that country is a signatory to the Convention), and for this reason arbitration can be a natural choice for major contracts. Once you’ve decided that arbitration will be your means of dispute resolution, the next step is to decide the institution and rules that will be applied. In very general terms, there are a few key arbitration institutions in all continents. Asia leans towards the Singapore International Arbitration Centre, Europe favours the London Court of International Arbitration, and the Americas looks to the American Arbitration Association.
The general acceptance of a particular law to govern contracts;
English law is almost universally accepted due to historic trade ties, while laws of emerging markets are less accepted internationally. When you are working with in-house counsel for the other party, consider where they may have done their training. For example, many Filipino lawyers have trained in the United States, and are comfortable advising their company on a contract that is governed by the State of New York. Counterparts in West Africa may be more comfortable signing off on a contract governed by French law, but this may be less appealing to their East African counterparts. It may sound simplistic, but I always advise my clients that when in doubt, go for English law. It is tried and true, foreign lawyers are generally competent in advising on it, and is widely regarded as a neutral system. In tech contracts, it is not uncommon to see the agreement governed by the laws of California, for obvious reasons.
What is the nature of your agreement, and what is the most likely cause of a dispute?
This, in my opinion, is the most frequently overlooked consideration when working on a dispute resolution mechanism. A joint venture or infrastructure project has vastly different dispute resolution requirements than a contract to supply fast moving consumer goods or software (including Software as a Service). Take a contract to supply goods to a reseller in a market where the manufacturer has no presence. One of the most likely disputes to arise is over payment, where the reseller receives the goods and fails to pay (note: at this point you should be kicking yourself for not obtaining a letter of credit or bank guarantee!). If you have selected the reseller’s local laws and court system for dispute resolution, you can engage a local lawyer to initiate debt recovery proceedings. You may have varying prospects of success, depending on the legal system and your status as a foreign company, but at least you can initiate proceedings in a reasonably cost-effective manner. If you have selected an overseas arbitration institution, you may need to establish an arbitration panel (which has a significant up-front cost to establish) and engage lawyers to run the arbitration. If you are successful in that arbitration, you may then even need to engage local lawyers in the reseller’s jurisdiction to enforce that arbitral award in the local courts. Often the advice to clients is that this is simply not going to be worth it.
What does the court system look like?
Unfortunately, transparent, fair and impartial court systems are not universal, and many multinationals know that when litigating against a local company they may not get the fair hearing that they would be used to at home. Often that comes with the package of doing international business, but sometimes that will simply not be acceptable. In these cases, arbitration in a neutral jurisdiction is going to be the most favoured option.
Make sure it’s logical
Whether you choose arbitration or court proceedings, and whatever governing law you elect, it’s important that the combination of laws and forums makes sense. I’ve seen a Singaporean entity commencing arbitration proceedings against an Indian company over a contract governed by Indian law. The customer (the Indian entity) owed the supplier (the Singaporean entity) a sum, which was disputed. The supplier needed to:
engage lawyers in Singapore to run the arbitration (though foreign lawyers may represent litigants in arbitration);
pay a fee to the International Chamber of Commerce to establish the arbitral tribunal; and
engage an Indian lawyer (and fly him to Singapore) to argue points of Indian law which governed the contract.
Arbitral Tribunals do not have powers that courts have to compel a party to appear, so cooperation is far from guaranteed. In this case the respondent customer did not cooperate, and although the decision was in the supplier’s favour, they still needed to resort to the Indian courts to enforce the arbitral award. With the benefit of hindsight, and for this particular dispute, submitting the dispute to the Indian courts may well have rendered a better result, at lower costs, for the supplier.
Here are some examples of dispute resolution mechanisms that I’ve seen, some which are very logical, others look destined for an expensive disaster. I’ve used the term “Buyer” and “Seller”, but this could just as easily be “Party A” and “Party B”.
A few final points
If you do elect arbitration, be sure to specify the institution that will administer the arbitration. You should state the language of arbitration and whether the parties will bear the costs of translation if this is necessary. It’s also important to consider the number of arbitrators (one or three) which can have a significant impact on the cost of arbitration. It’s fun to have a look at the ICC’s cost calculator to have an idea of how much it will cost the parties to set up an arbitral panel (hint: the cost almost triples when you engage three arbitrators!).
This article is the first in a series of articles by Quarterback Law designed to give practical information on international commercial transactions. It is based on my 15 years practising law across multiple jurisdictions. You will not find references to case law, legislation, or the latest judicial reasoning. Instead, you will find practical advice – in the same way that Quarterback Law provides its clients with practical, meaningful advice. I welcome your feedback based on your own experiences as well as any suggestions for future articles in this series.
Naturally, this article should be considered generalised information – it relies on generalisations and doesn’t consider nuances that are inherent in every deal. It is not legal advice.
