Major apologies to John Lennon.

Arbitration provisions fascinate me. They are the Rodney Dangerfield of the legal world in that they get no respect, not even among international lawyers.  This is a mistake.

I can nearly always judge the legal thought that went into an agreement through its arbitration/litigation provision alone. I usually can instantly tell from just the dispute resolution provision whether an international contract was drafted by a lawyer or not, and if it was drafted by a lawyer, whether that lawyer knows international law. Mistakes in this critical provision are rampant. Huge mistakes.

Some examples:

  • Company wants us to sue on a contract that calls for Arbitration before the International Court in Geneva Switzerland. Problem is there is no such court in Geneva. At a cost of at least ten times what it would have cost this company to have retained a qualified international lawyer to draft this contract, we successfully convince the Chamber of Commerce and Industry of Geneva that the parties intended for it to arbitrate their dispute before that body.
  • Denver lawyer contacts us about suing a large Chinese company on behalf of their client. Contract calls for litigation in Denver.  We tell the Denver lawyer this is probably the worst provision possible and he is shocked, asking why it does not benefit his client to be able to sue in its local court. We explain this provision means we will have to sue the client in Denver, spend months serving the opposing party in China (under the Hague Convention for service rules), spend another month or so getting a default judgment in the Denver Court against the Chinese company, and then take that judgment to China, where the Chinese court will almost certainly ignore it.
  • U.S. Company comes to us complaining of a company in China making its product with its molds and requesting we help it get a Chinese court to put a stop to this. We learn the Chinese company was until recently manufacturing this same product for our client under an OEM (Original Equipment Manufacturing) contract that provides for arbitration in New York. We tell the US  company we will probably first need to arbitrate this case in New York and even if we could get an order from the New York arbitration panel requiring the Chinese manufacturer cease production, no Chinese court will enforce it. We also tell the client we can go to court in China, but the chances are the court will refuse to do anything until the case is arbitrated first, if ever.

All of these situations could have been easily prevented with the right arbitration or litigation provision.

The first problem could have been avoided simply by naming a real arbitration panel. The second problem would not have occurred had the contract simply called for arbitration, not litigation. Had the contract called for arbitration in Denver (not litigation), we could have taken an arbitration judgment to China where the courts would have been required to enforce it pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (usually called the “New York Convention”), of which China is a signatory. Not that China is great at enforcing foreign arbitration awards, but at least the law would have been on our side.

The third situation could have been avoided had the contract explicitly carved out a litigation exception for injunctive relief or called for litigation in China.

What got me to thinking about arbitration today was a very nicely done article by the Patton Boggs law firm (no individual lawyers were listed), entitled, “Seven key points when considering an arbitration provision” [link no longer exists]. Though this article is geared towards all contracts (not just international ones), the advice it gives is both concise and thoughtful. I particularly like how it explains the importance of arbitration provisions:

To the untrained negotiator, an arbitration provision may be legal “boilerplate,” which means typical clauses that require little or no negotiation — a throw-in type provision. The reality is that parties should carefully weigh the benefits and disadvantages of arbitration in every transaction . . . .

The decision to use or write an arbitration provision in commercial transactions should not be made with a mechanical “one-size-fits-all” approach. It is critical that transaction parties consult with their litigation lawyers, not just their transactional counsel, and take the long view of the business relationship at hand and how the parties are going to resolve disputes. To neglect to tailor a dispute resolution provision to your needs at the outset of a transaction may lead to unnecessary disadvantage, expense and distraction down the road.

Amen to that.

Update: One of my firm’s China lawyers just got called in to assist an American company with their CIETAC Arbitration. Boy were they shocked when I told them that arbitration would be conducted in Chinese because the arbitration does not explicitly state otherwise.