International Dispute Resolution – A Business Primer

By: Gene M. Burd, Partner at Arnall Golden Gregory

1308 pose 9Business people are reluctant to discuss potential disputes when the deal is only at the inception stage.  They may feel that discussing the potential dispute is counterproductive and could be a deal breaker.  However, disputes do happen and deals sometimes do go bad even if all parties have the best intentions.  The chances are that a legal action ensues which could be lengthy and expensive.  Therefore, the issue of how to make resolution of the potential disputes more expedient and less costly is a valid issue to be raised at the outset of any deal.

In the context of international business, be that a franchise, project finance, or a trade deal, the aggrieved party may have an array of options for a claim.  For example, if the franchisor is in Minnesota, franchisee’s corporate office is in Delhi, and the business is in Mumbai, legal proceedings could be commenced in at least three different places.  The situation may become even more complicated if the deal, as it is often the case, involves third parties such as brokers and financial institutions.1308 pose 4

It would be expected for the claimant to file the case in the location which favors its interests.  Relevant factors include geographical proximity, familiarity with proceedings, perceived or actual friendliness of the forum, and the costs.  However, the respondent or respondents could have differing opinion on the better forum, which could lead to objections resulting in delaying the proceedings and making them more expensive.  The objections could even result in the dismissal of the claim.

To gain more certainty and to reduce the cost of a potential dispute, the parties may agree on how the dispute is resolved as part of their contractual understanding.  The agreement often addresses two principal issues: which law applies and which body will resolve the dispute.  Many factors play a role in making an appropriate selection.

Applicable Law.  In a cross-border transaction, the applicable law is often an uncertainty.  In the example above, the laws of Minnesota or India could apply to the franchising agreement.  There is a misconception that the laws of the place of contract apply.  This used to be the rule in many jurisdictions but is no longer the case.  Courts apply complex conflict of laws analysis to determine governing law.  Depending on which law is chosen, the contract could be interpreted differently or even voided altogether.  Therefore, it is crucial to agree on the applicable law.  But which one?

dibujo_01The answer depends on the type of transaction and the parties involved.  For example, Delaware has a well-developed corporate law, New York law has often been used in leasing and financing deals, English law is popular in the maritime community.  Laws of other countries, such as Switzerland, France, or Sweden have also been used in international transactions.  In sale and purchase transactions, parties may elect application of the United Nations Convention on the International Sale of Goods, which is an international treaty ratified by 80 countries.

The choice of law agreement may apply narrowly to disputes based on contracts or more broadly to those based on torts.  For example in a recent case, Abu Dhabi Inv. Auth. v. Citigroup, Inc., 2013 U.S. Dist. LEXIS 30214 (S.D.N.Y, 2014), the parties agreed that transaction will be governed by the laws of New York applicable to contract but failed to specify the law for non-contractual claims.  That allowed the plaintiff, Abu Dhabi Investment Authority, to assert that the more favorable law of Abu Dhabi applies to the fraud-based claims.  Although the court eventually rejected that claim, Citibank could have been held liable for billions of dollars in damages just because of uncertainty in the applicable law.  This case illustrates the importance of careful drafting of the choice of law clause.

Arbitration v. Litigation.  Another choice to make is whether to arbitrate or litigate the dispute.  Arbitration is, in essence, a private court.  Parties appoint arbitrators to resolve a specific matter.  Arbitrations can be administered by established arbitration bodies or by the parties themselves.  The former is called institutional arbitration and the latter is ad hoc arbitration. 1308 pose 9

There are numerous international arbitration bodies with different arbitration rules such as the American Arbitration Association, International Center for Dispute Resolution, Court of Arbitration of the International Chamber of Commerce, Swiss Chambers of Commerce, Stockholm Chamber of Commerce, International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and many others.

What is better litigation or arbitration?  There is no simple answer to that question.  Generally, when deciding between arbitration or litigation, parties should consider the following:

Time.  Arbitration is normally more expeditious than litigation.  This is true even in cases with multiple parties and cross-border disputes. However, in some instances, court proceedings could be more efficient because of some court’s strict internal scheduling guidelines.

Confidentiality.  Arbitrations are normally confidential and the awards are not published.  Arbitration hearings are private as opposed to the court proceedings that are open to the public.  Therefore, disputes could be resolved without unnecessary publicity which could be harmful for business, especially if the parties have an ongoing relationship.

Cost.  Traditionally, arbitrations were considered as a lower cost alternative to litigation.  However, this is not always the case..  In arbitration, the parties are responsible not only for the costs of their legal representation but also for the fee of the panel of arbitrators which may include three expensive lawyers or retired judges.  The parties are also required to pay administrative fees if there is an institutional arbitrator.  However, arbitration often wins the cost battle because of a more limited discovery, which represents a major portion of litigation costs.

Discovery.  As noted above, discovery, a compulsory disclosure of relevant documents and witness depositions, is one of the most expensive parts of the litigation.  In a complex commercial case, discovery may result in the production of the thousands of documents and depositions of dozens of witnesses.  In today’s age of electronic communication, discovery of Electronically Stored Information (ESI) could be even more intrusive and expensive.  In contrast, discovery in arbitration, especially in international arbitration, is normally limited and focused on the documents.

Appeal.  Closely related to the timing and cost is the possibility of appeal.  Court judgments are fully appealable on the issues of law and underlying facts.  Arbitration awards can only be set aside based on a limited number of grounds.  The Federal Arbitration Act, U.S. law governing arbitration, only allows appeal where (1) the award was procured by corruption or fraud; (2) the arbitrators were impartial or corrupt; (3) the arbitrators committed some type of misconduct such as refusing to consider material evidence; and (4) the arbitrators exceeded their powers.  There is some uncertainty in the law whether an arbitration award could be appealed based on the manifest disregard of the law by the arbitrator. However, practically speaking, the “manifest disregard” appeals rarely succeed in international commercial arbitrations.

BulldozerFelix       Enforcement.  International arbitration awards are enforceable pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) in 149 countries.  The grounds to deny enforcement under the New York Convention are limited and do not include the merits of arbitration awards.  In contrast, the enforcement of court judgments is more complicated.  The United States is not a member to any treaty for recognition of court judgments.  That is not to say that a court judgment issued in another country cannot be recognized in the United States or a judgment of the U.S. country cannot be enforced in another country.  The process for enforcement of judgments is generally more cumbersome and less certain.

Not surprisingly, a knee jerk reaction in considering the above factors could be to choose arbitration rather than litigation.  That, indeed, would make sense in many cases, especially in the international context.  However, under certain circumstances, litigation could be more advantageous and effective tool to protect party’s interests.  For example, broad U.S. – style discovery could benefit a plaintiff who claims fraud and misrepresentation.  Witness deposition may reveal key information crucial to the case.  Documents obtained from the third parties, may provide additional supporting evidence.  Moreover, broad discovery reveals strong and weak sides of each party’s position, which encourages early settlement of disputes, thus, resulting in overall cost savings compared to arbitration in certain cases.

In conclusion, consider all the factors, both advantages and disadvantages, before making the decision.  Likewise, do not rush to agree to the dispute resolution clause and the choice of law proposed by your counter-party just to make the deal go through.  Remember, dispute avoidance begins with the careful planning of the resolution mechanism.

GlobalFelix

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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