Agree how to disagree - the first step to dispute resolution

James Berger, a partner at King & Spalding, explores the ways effective planning can minimise fallout from 'inevitable' commercial rows

PUBLISHED : Wednesday, 24 October, 2012, 12:00am
UPDATED : Wednesday, 24 October, 2012, 4:01am

The only thing predictable about commercial disputes is that they are inevitable. What steps can the prudent executive take to minimise the disruptions from disputes?

While disputes are unavoidable, effective planning can reduce the disruptions they cause.

If a commercial party fails, through negotiated contractual provisions, to make agreements governing where, how, and by whom disputes will be resolved, that party might have to answer a lawsuit brought in a distant forum. That forum will typically be chosen because it is inconvenient, unfamiliar, and expensive for the defendant, who may be required to litigate a dispute under foreign procedures and law.

As a result, sophisticated parties routinely include dispute resolution provisions in their agreements.

These agreements may take many forms, ranging from "governing law" agreements, which say that a particular body of law will govern the contract; and "forum selection" clauses, in which the parties agree to litigate any disputes before a particular court; to arbitration agreements, through which the parties agree to forego litigation in favour of arbitration.

Most sophisticated commercial contracts contain both a governing law provision and either a forum selection or arbitration clause.

How can I control the law that will govern my commercial contracts?

Where contracting parties are from different countries, whose law should govern a dispute that arises between them?

What if the contract is to be carried out in a country that neither of the contracting parties is from?

Needless to say, national laws on various topics may be substantially different; even the method of legal analysis differs between common law jurisdictions such as Hong Kong and civil law jurisdictions such as Thailand.

As a result, the question of "whose law applies" is critical, and in many instances may determine who prevails in a commercial dispute.

Where parties fail to agree on the law that will govern their agreement, a court or arbitrator hearing a dispute will be required to decide the issue. That analysis requires consideration of several factors, and they can be very unpredictable.

The prudent negotiator, therefore, should seek to include a governing law provision specifying the law of a specific jurisdiction that will govern the contract.

Parties typically choose the law of a jurisdiction with a well-developed body of commercial law. In addition to Hong Kong law, parties often choose the law of Singapore, Britain, or the US states of New York and Delaware.

In transactions that involve offshore entities, the law of the relevant jurisdiction - such as the Cayman Islands - may be used, while in transactions involving parties with unequal bargaining power, the "stronger" party may insist upon the application of its home law.

Whichever law the parties ultimately decide to apply, the inclusion of a governing law clause eliminates legal uncertainty and allows the parties, in conjunction with their counsel, to understand the laws that will govern any dispute that might arise.

The parties have agreed on the law that will govern our agreement. Is that enough?

It's not enough. Just because the parties have agreed that the law of country X will govern the contract does not mean that disputes over that contract must be brought before a court in country X.

A court's ability to hear a case depends primarily on whether the court has jurisdiction over the defendant; and that analysis turns on the defendant's contacts with the jurisdiction where the court is located.

Where a company has business dealings around the world, courts in several countries might be able to exercise jurisdiction over it, and a party claiming against it may seek a tactical advantage by bringing the claim in a court it perceives as most favourable and that will maximise the expense and inconvenience to the company it sues.

As with choice of law, however, contracting parties can minimise the risk of a suit in a distant or unfamiliar court by agreeing in advance on the forum that will hear any disputes.