1. International Dispute Resolution Clauses
Every month or so, a lawyer will write me out of the blue with a “quick question” about a draft contract. One of the most common “quick questions” we get are those asking us to “confirm” that some particular court or arbitration body would make the most sense for such and such type of contract. I usually respond to this question by explaining that to be able to confirm or disagree with their having chosen X arbitration panel or Y court I would need to review the entire contract and know a ton more information. About half the time, the lawyer responds by asking like what? I then respond by saying that when the lawyers at my firm are trying to figure out the best venue (location) and method (arbitration versus litigation) to put into an international contract, we typically consider the following:
- Who the parties are.
- Where the parties are located.
- The applicable law. This is super important.
- The contract language.
- The nature of the contract.
- The goals of the client. Money? IP protection? Something else?
- The likelihood the client would breach the contract as compared to the likelihood the other side would breach the contract.
- The sort of disputes likely to arise.
- The language(s) spoken by the client and the other side
- The client’s wealth as compared to the wealth of the other side.
- The need to engage in discovery if there is a dispute.
- The need to bring in third parties to any dispute.
- The complexity/simplicity of likely disputes
- Appeal concerns.
- Confidentiality concerns.
- Concerns regarding speed of dispute resolution.
- Enforcement of judgment/award concerns.
2. Contracts Do Not Exist in a Vacuum. Context is Everything.
A long time ago, a large manufacturing company client contacted me to help with an international product recall. This company’s product had a faulty and potentially dangerous part that had been provided to it by one of its smaller suppliers. My first thought was that my client should seek reimbursement of the recall costs from this small supplier and the small supplier’s insurance company. Towards that end I asked for a copy of the supply contract as between my client and its supplier.
Unfortunately, the contract protected the small company in every respect possible. This surprised me because big companies typically impose its terms on small suppliers. I asked my client contact (an excellent international compliance person, but not a lawyer) why his company had allowed such an unfavorable contract to be used. He told me his company had believed this was a really well drafted contract and it had recently stared using it with new suppliers. My response was that it was one of the best drafted supply contracts I had ever seen and that was part of its problem; it had been incredibly well drafted but entirely in favor of the supplier, not my client. I then asked who had drafted this contract (I was especially curious because I thought my firm had a lock on this company’s international contracts). His response was that no lawyer had drafted it; a non-lawyer high up in supply chain management had seen this contract when my client’s largest supplier had required they sign it and “he just figured it would be a really good contract because it came from XYZ company.” My response was that it is a great contract, but a great contract for a parts supplier, NOT for a parts recipient and when XYZ company required you sign this contract it was acting as a supplier. The client ended up paying every dollar of the recall.
What would happen if a lawyer had been handed this supplier contract for a one or two hour review from another lawyer without being provided the context behind the contract? The lawyer would review it and say this is a great contract and I don’t see anything that needs to be changed.
Context is equally crucial for dispute resolution clauses.
3. Some Past History for Your Learning Pleasure
Over the years, my law firm’s international dispute resolution attorneys have dealt with the following situations, the facts of which have been modified to eliminate the possibility of anyone recognizing the specific matter:
A. Tokyo Jurisdiction
An American company came to us after learning that its Chinese manufacturer has been manufacturing and selling the American company’s newest version of its core product. A provision in the contract expressly states that future iterations of the core product would belong to the Chinese company and I mention this to the potential client. The potential client then tells me that when it complained to its Chinese manufacturer about IP theft, the Chinese manufacturer cited to the same provision and said the product now belonged to them.
To make matters worse, the contract called for all disputes to be resolved in “Tokyo Superior Court.” I asked the potential client how it was decided Tokyo Superior Court would be the venue for disputes and they explained as follows:
The Chinese company asked for disputes to be resolved by arbitration in Beijing and my lawyer said we wouldn’t stand a chance there and so we refused. The Chinese company then proposed Singapore or Hong Kong arbitration and my lawyer countered with Tokyo Superior Court because it was the opposite [both with respect to the type of forum — arbitration versus court — and the location] of what the other side wanted.
I then explained how no country other than China will allow for a lawsuit in its courts that has nothing to do with its country and because this case would involve a US-based company going up against a China-based company on an issue with zero relevance to Japan, there is no way a Japanese court will allow itself to be a free (or nearly free) public forum for this dispute. I did not even bother to mention there is no such thing as the Tokyo Superior Court or that even if the US company were to sue in Tokyo, get its case heard in Tokyo (which will never happen), and then win in Tokyo, no court in China would ever enforce the judgment because the Tokyo court never had legitimate jurisdiction over the matter.
B. Toronto Jurisdiction
This is one of my favorites. I got an angry email from someone that essentially says as follows:
I read your blog regularly and carefully and you were wrong about Canada and that makes me wonder what else you have been wrong about. I read one of your posts where you talked about how you like to propose Canada for disputes because Chinese companies often will agree to that. Well the Chinese company we work with did agree to that but when it came time for us to actually sue them there, all of the Canadian lawyers told us that we couldn’t.
Future communications revealed that — based on my having extolled the virtues of proposing Canada for arbitrations — this company thought it could list the Toronto courts as the jurisdiction for disputes between its US-based company and its Chinese counterpart. Just as would have been true in the Tokyo instance above, there is no way a Toronto court will hear a dispute between two foreign companies on a matter with no connection or even relevance to Canada. Fortunately, the Canadian lawyers with whom this company spoke realized this and chose not to waste the US company’s time and money pursuing litigation in Toronto. I had to point out that we constantly emphasize that dispute resolution provisions must be written to suit the facts, situations, and laws specific to the particular parties and contracts and there is a big difference between what can be done in arbitration and what can be done in a foreign country’s courts. I should also have pointed out our disclaimer:
The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice…. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.
C. Split Jurisdiction.
We get this one fairly often. The contract provides that the Chinese company must sue the United States company in a U.S. court and the U.S. company must sue the Chinese company in a Chinese court. The thinking behind this is logical but its execution is so flawed that we nearly always avoid these provisions.
These provisions initially seem to make sense because this sort of split jurisdiction appears to favor the U.S. company. If the Chinese company seeks monetary damages from the American company, it must go through the trouble of suing the American company in a U.S. court where the U.S. company will presumably get a fair trial. And on the flip side, the American company can sue the Chinese company in a Chinese court, which is (90 percent of the time, anyway) exactly where the U.S. company should want to be. For why this is the case, check out China Enforces United States Judgment: This Changes Pretty Much Nothing and China Contracts: Make Them Enforceable Or Don’t Bother.