Practical tips on using dispute resolution clauses

By Cui Qiang, Commerce & Finance Law Offices
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The dispute resolution (DR) clause is often referred to as the “midnight clause”, which may reflect a fact that generally it is addressed at a relatively late, if not the last, stage of business negotiation. When a dispute arises, parties may eat the bitter fruit of their negligence in arranging the DR mechanism. To help readers better address the DR clause, the author provides some observations.

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CUI QIANG
Partner
Commerce & Finance Law Offices

COMPLEX OR SIMPLE?

In most cases, it is sensible to choose a simple DR clause, especially model clauses provided by arbitral institutions or courts. The reasons are straightforward. On the one hand, it is less likely that a simple dispute resolution clause contains inconsistencies per se. On the other hand, when facing complex transactions, conflicts between DR clauses in different contracts can be effectively minimized if all these clauses are drafted in a simple fashion.

An important note: the condition precedent for a DR clause being simple is that it has contained all requisite elements under the applicable law. For instance, an arbitration clause governed by the PRC Law should meet the formality requirements set out in article 16 of the Arbitration Law, namely: (1) expressing the intent to submit disputes to arbitration; (2) outlining the matters to be arbitrated; and (3) appointing an arbitration commission.

If certain deals warrant a complex DR clause, the author suggests that the legal adviser be in place to ensure the DR clause is: (1) valid and enforceable; (2) to the advantage of the client; and (3) consistent with other relevant provisions or agreements.

BROAD OR NARROW?

With few exceptions, it is wise to employ a “broad” dispute DR clause. As a matter of fact, allowing as broad a dispute as possible to be resolved within a defined approach can effectively contribute to procedure and outcome consistency. Meanwhile, legal costs should be well under control to avoid “fights” between otherwise different DR approaches.

Imagine an extreme scenario where a clause reads: “Any dispute relating to the interpretation of this contract shall be referred to Court A, and any dispute relating to the performance of this contract shall be submitted to the arbitration of B…” A clause like this cannot be executed and there may be endless arguments over its validity and interpretation.

In practice, broad DR clauses usually begin like this: “Any dispute, controversy or claim arising out of, or relating to, this agreement, including its validity, invalidity, breach or termination, whether contractual or not (including but not limited to torts), shall be…”

LITIGATION, ARBITRATION OR OTHERS?

The choice of a specific DR approach depends on specific circumstances. General recommendations are provided below in two given scenarios:

Scenario I. If the transaction has an international nature, arbitration should be preferred for its advantage of cross-border enforcement. Since all major trading states are parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (aka the New York Convention), it is almost common practice for an arbitral award of a New York Convention country to be recognized and enforced in another New York Convention country.

But, on the contrary, a foreign judgment being recognized and enforced is highly uncertain, albeit not impossible, as to date there is no universally applicable convention regarding the recognition and enforcement of judgments of foreign courts. Besides, an investor may pursue investment arbitration (for example ICSID [International Centre for the Settlement of Investment Disputes] arbitration) if the counterparty is a state or the like.

Scenario II. If the parties are more concerned about the efficiency and confidentiality of dispute settlement, arbitration should be preferred. Unlike litigation, which puts more ink on justice and transparency/publicity, arbitration highlights party autonomy. Accordingly, arbitration proceedings provide more flexibility and confidentiality for users.

PRC-RELATED CONSIDERATIONS

There are two key considerations when the transaction or dispute links the PRC. As mentioned, the PRC Law sets out unique formality requirements on arbitration clauses. On top of that, the PRC Law prohibits submissions of non-foreign-related disputes to offshore arbitration. (Exception: An arbitration agreement between wholly foreign owned enterprises incorporated in the Pilot Free Trade Zones providing commercial disputes to be submitted to offshore arbitrations will not be deemed invalid for lack of foreign-related elements). As such, foreign-related elements should be ensured in place for offshore arbitration agreements.

Chinese courts also provide limited support for offshore arbitrations due to the lack of legal bases for recognizing and enforcing interim measures of such proceedings. As such, if the other party attempts to transfer its assets in the PRC, the PRC should be considered as an option for the seat of arbitration so as to secure the appropriate preservation upon commencement of the arbitration proceedings.

CONCLUSION

The above tips are for general reference only, and by no means exhaustive. As readers may have seen, DR clauses can be categorized into various groups, including without limitation, symmetrical or asymmetrical, exclusive or non-exclusive. The author looks forward to providing more specific advice on how better arrangements can be formulated.

Cui Qiang is a partner in the Beijing office of Commerce & Finance Law Offices. He can be contacted on +86 10 6569 3399 or via email at cuiqiang@tongshang.com