ADR SPOTLIGHT: Structuing dispute resolution clauses in international contracts

By Harshitha Ram

The magnifying global economy largely depends on international business to counter uncertainties in global transactions. A crucial aspect of preserving an enduring business relationship is to choose the right mechanism to resolve disputes. Often stipulating the method of resolution before a dispute arises can stabilize the situation, protect the prospects of future business and preserve the parties’ business relationship. In the absence of an appropriate dispute resolution clause, the parties may lose time looking for an appropriate forum that has both subject matter and personal jurisdiction over the dispute.   

Choosing an arbitration clause for the resolution of international commercial transactions produces more predictable outcomes than litigation and ensures neutrality in the procedure. The nature of the international contract, the type of transaction involved, the cultural differences, and the variety of jurisdictions involved are all essential factors to consider when setting forth a resolution clause. The rising global economy may prompt lawyers to place greater emphasis on drafting effective ADR clauses to face unpredictable international business outcomes. A coherent clause will put the disputant parties at ease as this would enable them to focus on the resolution of the dispute that has arisen instead of losing time working on making cosmetic corrections to the clause itself.   

The purpose of the ADR clause is to convey the parties’ intention to resolve any contractual or non-contractional dispute. It should perhaps reflect the parties’ interest and intention of resolving the dispute and preserving the business relationship rather than accomplishing continued unresolved open areas of conflict. The ADR clause must be clear and concise. The complexities of international commercial transactions often befuddle even the expert international attorneys. The simple solution is to construct an effective built-in dispute resolution clause. Failing to incorporate an efficacious dispute resolution clause and ignoring the ramifications may lead to ruminative consequences that are often time-consuming and expensive.   

Choosing between litigation and arbitration requires the parties to take into account several important factors. In most cases, stipulating to litigate the dispute in a foreign court is not the right solution to the problem. The possibility of future business predominantly relies on a stable and pleasant business relationship. ADR clauses allow the parties to have better communication and avoid greater losses. The resolution clause may be for negotiation, mediation, arbitration, or another hybrid mechanism. There are certain advantages and disadvantages in using litigation over arbitration and vice versa.   

However, the fundamental objectives of the processes differ. Broadly speaking, arbitration is the optimal dispute resolution method in international contracts. It is understood that often in dispute resolution the outcome will depend on the neutral that decides the requisite legal standards applicable to the matter.   

It’s quite common for parties to inadequately formulate dispute resolution clauses during the contract negotiation phase, which often results in havoc during the performance of the obligations. The advantage of providing an effective dispute resolution clause in a contract is to keep the dispute out of the purview of state courts. Structuring the dispute resolution clause can be challenging. It is pertinent to note that some specialized language may not be intuitive even for legal practitioners who are generally accustomed to drafting domestic contracts. This simply means that devoting extra effort will promote success in reaching the intended results when structuring the clauses in an international business contract.   

The United Nations Commission on International Trade Law (UNCITRAL) was adopted by the United Nations general assembly in 1976, it is a set of fine guidelines for arbitral clauses and it serves as the basis for rules of existing arbitration institutions. Some of the popular international arbitral institutions include the ICC international court of arbitration (ICC), the International Centre for Dispute Resolution (ICDR), The London Court of International Arbitration (LCIA), Stockholm Chamber of Commerce (SCC), Singapore International Arbitration Centre (SIAC), etc. Although there are a set of boilerplate clauses available through these institutions when formulating arbitration clauses, the parties need to focus on some key factors, such as the choice of forum, choice of law, the seat of arbitration, venue, language, the appointment of arbitrator, discovery rules, awards and enforcement of awards.   

UNCITRAL Model Clause: Any dispute, controversy, or claim arising out of or relating to this contract or the breach, terminations, or invalidity thereof, shall be settled by arbitration by the UNCITRAL Arbitration Rules as at present in force.   

The appointing authority shall be (name of the institution or person) The number of arbitrators shall be (one/three) The place of arbitration shall be (city and/or country) The language(s) to be used in the arbitral proceedings shall be (language) This clause may be used for both institutional and ad-hoc methods of resolutions. In international arbitration, it is not unusual for a contract to have more than one state’s law. There can be a variety of applicable laws including 1. the law governing the substantive contract, 2. the law governing the procedural aspects of the arbitration, 3. the law governing the arbitration agreement, and 4. the state law where the award will be executed. The governing law of the arbitration agreement need not be the same as the law of the contract. By the doctrine of separability, the arbitration agreement may be governed by a different law than the law of the substantive contract.   

Further, it is important to understand the fundamental difference between the venue and seat of arbitration, and parties should have clarity in their clauses. ‘Seat’ in international arbitration simply means the place where the state court has governing powers over the arbitral proceedings. Whereas, venue means the place where the proceedings of the arbitration take place, which is the physical hearing location of the arbitration process.   

Parties involved in international transactions should initially attempt to understand the differences between domestic and international commercial dispute resolution processes and the fundamental differences in their execution. This will give them the confidence to choose one approach over the other. Certainly, incorporating a dispute resolution clause in the contract will enable the parties to reap intangible benefits during the dispute resolution process. Frequently, in international contracts, cultural differences and working styles are most often the potential aspects of disputes. The international arbitration community strives to find solutions to harmonize the multi-pronged approach in resolving international disputes and to settle for a standard approach. In principle, arbitration bestows special advantages that often outweigh its shortcomings. A crucial advantage of an arbitration clause is the avoidance of the nightmare of standing before a foreign court dealing with unfamiliar procedures.
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Harshitha Ram is an international disputes attorney, arbitrator, and mediator. She is the founder of Lex Apotheke offering legal and dispute resolution services. Ram earned a masters in Dispute Resolution from the University of South Wales, UK. She has a global practice and handles issues in versatile domains. She serves as both Fellow and panelist in numerous national and international arbitration panels and is a globe-trotter. Besides being the Fellow of the Chartered Institute of Arbitrators (CIArb), she is on the panel of commercial and consumer arbitrators at the American Arbitration Association (AAA), chair, The Michigan Dispute Resolution Journal initiative, State Bar of Michigan, Affiliate, ADR Section - State Bar of Michigan, panelist, Professional Resolution Experts of Michigan (PREMi, http://premiadr.com) - an invitation-only group of Michigan’s top ADR professionals. She is frequently invited as a guest speaker, lecturer & ADR trainer by Universities and ADR service providers in the UK, USA, Europe, and Asia. She is currently leading an international program on accreditation of ADR professionals worldwide.