[co-author: Theodora Okocha]
Although parties rarely consider dispute resolution provisions in any great detail at the contractual negotiation stage of a transaction, they should. Time spent on considering these issues at the outset will ultimately prove to be invaluable down the road should a dispute occur, saving time, costs and energy in the long run.
At the latest Trade & Export Finance Webinar, we looked at key considerations parties should take into account when opting for litigation versus arbitration and offered some practical tips to bear in mind for drafting dispute resolution provisions for your contracts.
Key points from the webinar included:
Litigation or arbitration?
Any discussion about the merits of litigation over arbitration in a particular scenario presumes that the parties will be choosing and agreeing one of these methods over the other. However, it is still all too common for certain trade products, particularly letters of credit, not to have a governing law or jurisdiction clause. These omissions can often exacerbate what is already a contentious scenario, underlining the importance of not only taking time to consider the appropriate dispute resolution method at the outset, but also to ensure that your chosen method is reflected in the contract.
Ultimately, there is no one-size-fits-all approach to dispute resolution. The decision to litigate or arbitrate turns upon a number of factors, including:
- Does your transaction concern a niche area of law or complex financial product? If so, arbitration may be better suited, as parties can nominate tribunal members with relevant experience in that area.
- Is flexibility important to you? Arbitration typically affords more control than litigation does, as parties are free to agree the procedural rules that will apply, potentially resulting in shorter timetables and lower costs.
- Are you seeking a binding precedent in respect of a particular contractual or policy wording? If so, litigation may be preferable.
- Are you looking to avoid adverse publicity in the event of a dispute? Consider arbitration, as arbitral awards are generally confidential—court judgments are not.
- Where would you be looking to enforce an arbitral award or court judgment? As a general rule, the enforcement of arbitral awards tends to be easier on the basis of the New York Convention to which over 160 countries are signatories. There is no such equivalent enforcement regime for court judgments. Recognition/enforcement will be a matter of national law unless there is a reciprocal enforcement regime or bilateral treaty in place. In the case of enforcement in Europe, the post-Brexit position is still somewhat unclear.1
Suitability of arbitration for banking/finance disputes and key developments in institutional arbitral rules
Traditionally, arbitration has been perceived as less suitable for banking and finance disputes, primarily on the basis that it is ill suited for conducting complex proceedings with multiple parties under multiple contracts, as well as the lack of expedited summary proceedings. In an effort to combat this reputation, some arbitral institutions, including the London Court of International Arbitration (LCIA) and the ICC International Court of Arbitration (ICC), have updated their rules to make the process of joinder and consolidation of claims easier,2 although the consent-based nature of arbitration still poses some difficulties as parties still need to agree. Some institutions are also offering expedited timetables for straightforward claims, as well as interim/emergency measures for cases deemed to be urgent.
In addition to modernising their rules to better suit the needs of parties, some arbitral institutions have also sought to respond to the very real challenges posed by COVID-19. The 2020 LCIA Rules apply to arbitrations commencing from 1 October 2020 and were updated with a view to accommodating the increased use of technology, embracing fully virtual hearings, the use of email as a primary means of communication and the electronic signature of arbitral awards. The 2021 ICC Rules apply to arbitrations registered with the ICC after 1 January 2021 and similarly empower a tribunal to order virtual hearings.
Our own recent experience with virtual hearings is that they work very well provided that sufficient preparation is undertaken. While they certainly afford some great efficiencies, some practical challenges to bear in mind are internet connectivity issues, time differences that might affect the hearing timetable and whether a particular video conferencing platform will meet parties’ security needs.
Practical tips for drafting your contracts
Whether parties choose arbitration or litigation, it is vital that they devote some time to considering their preferred dispute resolution process at the outset. As the caselaw demonstrates time and time again, poor drafting often leads to unnecessary additional litigation.
In particular, it is key that parties include both a governing law clause and jurisdiction clause in their contracts and consider their specific circumstances to make an informed decision as to each. While the decision to choose the non-exclusive jurisdiction of one country’s courts or one arbitrator rather than three may not seem significant when trying to finalise commercial terms and close a deal, these are the types of decisions that can potentially have the biggest impact if a dispute occurs.
There are a variety of template dispute resolution provisions that can be used as a good starting point when drafting your contracts. However, it is important to remember that these are intended to be a starting point only and will need to be tailored as appropriate to the parties’ considered and agreed position.
Please click here for a link to a video of the webinar to find out more.
1 While English law court judgments will generally still benefit from streamlined enforcement procedures under the Hague Convention, provided there is an exclusive jurisdiction clause, the UK is still awaiting a decision on its application to accede to the Lugano Convention. As at the date of this post, the EU Commission has indicated that it does not support the UK’s application to accede to the Lugano Convention on the basis that it is not a member of the EEA or EFTA. The EU Council will have the final say.
2 Ad hoc arbitration may also be a good option, particularly as it can be tailored to a particular industry. It has traditionally been a popular choice in the shipping and construction industries (to name a few).