Global Paths Through Alternative Dispute Resolution
by Ernest Sasso, Esquire
COUNSEL CHARGED with the drafting of international trade contracts — whether for a single sales transaction, or an ongoing relationship, such as a joint venture or distributorship agreement — will typically be faced with two alternative theories of dispute resolution: judicial recourse through the national courts of the contracting parties (absent the specification of a neutral judicial venue), or arbitration proceedings. For any number of valid reasons, including putative speed, economy and ease of enforcement of awards, the majority of international commercial agreements provide for arbitration as the designated vehicle for dispute resolution, particularly where long-term relationships are involved. While a contractual provision for recourse to judicial remedies may be viewed with suspicion by the non-drafting party, neither side will generally regard the incorporation of an arbitration clause as a hostile measure, in the belief that such a vehicle provides an amicable means of external resolution for any unforeseen disputes. Furthermore, while perceptions of arbitral economy and speed may be misplaced in the global arena (for example, international arbitration hearings may be longer than trials because no discovery or pretrial motions are available to narrow or focus the issues, in addition to the difficulties of scheduling experienced arbitrators from multiple countries), in most jurisdictions parties may be represented by counsel of their choice, with no impediments restricting appearances by foreign lawyers.
In international contracts, the enforcement of an arbitration clause is controlled by both the Federal Arbitration Act, and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and its implementing legislation. Under the Federal Arbitration Act, questions governing the scope of the arbitration clause are a matter of federal law, with recourse to the law selected to govern the contract for interpretation of the language of the clause. Despite the strong federal policy favoring arbitration, court decisions construing the scope of arbitration clauses are not immune from the fine semantic decisions distorting forum selection cases. Thus, a clause calling for arbitration of any disputes “arising under” a contract may be construed far more narrowly than a clause calling for arbitration of any disputes “arising out of or relating to” a contract. A clause calling for arbitration of disputes “arising under” a contract may be limited to claims relating to the interpretation or performance of the contract itself. Meadows Indemnity Company, Ltd. v. Baccala & Shoop Insurance Services, Inc., 760 F. Supp. 1036 (E.D.N.Y. 1991). In drafting an agreement between parties intending to arbitrate all contentious issues, the prudent practitioner will insert the following standard clause: “Any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof, shall be finally resolved by arbitration.”
The parties should specify a particular state’s or country’s substantive law as the law governing the contract. The choice should be made based on the nature of the transaction and the stability of the chosen jurisdiction's commercial law. This choice-of-law clause should, however, specifically exclude application of the chosen jurisdiction’s conflicts-of-law rules, to avoid the arbitral application of yet another jurisdiction’s substantive law. More importantly, the jurisdiction’s procedural rules must be excluded to avoid the ramifications of the United States Supreme Court’s pronouncement in Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University 489 U.S. 468 (1989). In Volt, the parties provided for arbitration of all disputes “arising out of or relating to” the contract, and that the contract would be governed by the law of “the place where the Project is located.” As the project was located in California, the Supreme Court ruled that the selection of California law to govern the contract meant the parties had selected California arbitration law as well, despite the normal application of the Federal Arbitration Act. Contrary to United States federal law, California arbitration law permits a court to stay arbitration pending resolution of related litigation involving third parties, with the anomalous result of one party (typically, the U.S. contractual partner) having the ability to frustrate the contract's arbitration provision by merely instituting litigation with third parties in state court. Thus, to avoid the implications of the Volt Court’s selection of all state law in lieu of otherwise applicable federal law, in situations where state law is not statutorily preempted by federal law, the following provision is suggested: “the substantive, but not the procedural laws of [name of state] shall govern interpretation of this contract, except where a United States federal law would be applied by a [name of state] state court judge, in which case that federal substantive law applies.”
The choice of place or situs of the arbitration is among the most important choices in drafting arbitration provisions, and care should be taken at the time of contracting in designating a location appropriate to the parties. Beyond its impact on the access to evidence and the convenience of witnesses is the significance of the seat of arbitration for enforcement of the award. Under the 1958 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention and subscribed to by the U.S., Canada, the European Union, and most countries in Asia and South America, the place or seat of the arbitration determines where it is enforceable, not the nationality of the parties. Subsequent arbitration hearings may be conducted at locations more convenient for the parties or witnesses.
While arbitration may be the most frequently used dispute resolution vehicle in international agreements, its stipulation is not a panacea to mask poorly drafted commercial agreements, and its advantages over recourse to judicial remedies are not so patently obvious as to negate scrutiny of its appropriateness on a transaction by transaction basis.
In drafting the arbitration provision after such analysis, counsel should consider the culture of the parties and needs of the client, as well as court holdings addressing the language of the arbitration clause.