In this article, we discuss basic but important points to consider when drafting a dispute resolution clause in English-language contracts. If a contractual dispute arises, parties that have failed to appreciate these points may find themselves initially in a fight over the dispute resolution clause itself (rather than the substantive merits of their dispute). While surprisingly common, such fights are a waste of parties’ resources (both time and money) that could and should have been avoided with more sensible and intelligent drafting at the outset.
1. Dispute Resolution Clause: Introduction and Basic Elements
Parties should always include in their contracts an agreed-upon process for resolving any disputes that may arise and cannot be settled amicably. An effective, clearly written dispute resolution clause is important to help parties resolve any disputes as efficiently and fairly as possible.
Preliminarily, parties need to consider what dispute resolution mechanism they wish to agree. The usual alternatives in this respect are litigation and international arbitration, both of which offer parties a formal means to resolve disputes in a final and binding manner. Litigation involves resolving a dispute in court (i.e., a lawsuit), which typically is a public proceeding where a judge decides the case. International arbitration is a private (and usually confidential) method of dispute resolution where one or more arbitrators decide the case.
Whether parties may prefer litigation or arbitration may depend on various factors. For instance, if the parties are all from the same country, their contractual and commercial relationship concerns only that country, and they consider their court system to be fair and impartial, it would be reasonable for them to agree to use that court system in their dispute resolution clause. In addition, litigation may be more appropriate for certain kinds of contracts. Non-disclosure agreements, for example, may require swift action to prevent a party’s breach, and often courts can act more quickly than arbitrators.
Where contractual parties are from different countries, a party may not wish to resolve a dispute in the courts of the other party’s home country. In such circumstances (i.e., where parties are engaged in cross-border transactions), parties commonly choose as a neutral alternative international arbitration, often under the rules of arbitral institutions such as the International Chamber of Commerce, Singapore International Arbitration Centre, or Japan Commercial Arbitration Association. Arbitration also offers flexibility in terms of process because parties usually can have input about selecting the arbitrators and the arbitration procedure, including the schedule of the arbitration.
When drafting the dispute resolution clause, simple is often best. Parties should negotiate and specifically choose either litigation or arbitration. If litigation is selected, parties should clearly identify which jurisdiction’s courts they wish to use (e.g., the courts of Tokyo, Japan) in the dispute resolution clause.
Any dispute arising under or in connection with this Agreement or related to the terms of this Agreement shall be subject to the exclusive jurisdiction of the Tokyo District Court.
If arbitration is selected, parties should clearly identify which arbitration rules will be used and the place of the arbitration (which does not have to be the home country of any party) in the clause. Parties also may wish to agree the language of arbitration.
Any dispute, controversy, or claim arising out of or relating to the Agreement shall be referred to and finally resolved by arbitration under the Commercial Arbitration Rules of The Japan Commercial Arbitration Association. The seat of arbitration shall be Tokyo, Japan. The language to be used in the arbitral proceedings shall be English.
2. Dispute Resolution Clause: Other Elements and Potential Pitfalls
While simple is often best (and entirely sufficient) when it comes to drafting the dispute resolution clause, sometimes parties may wish to include elements in their clause other than those indicated above. For example, they may wish to provide that, if a dispute arises, they first will try to settle the dispute by negotiation and/or mediation (mediation is a non-binding method of dispute resolution where a mediator helps to facilitate the parties’ negotiation) before commencing litigation or arbitration. These and other elements may be included in a dispute resolution clause, but care needs to be taken by parties with the language they use. For example, it is important to include specific deadlines for any negotiation or mediation (e.g., 30, 60, or 90 days) to ensure that one party does not seek to prolong these processes unduly in order to avoid commencing litigation or arbitration.
When drafting the dispute resolution clause, parties may be prone to make one of two common mistakes – and in either instance this can cost them considerable additional time and money if an actual dispute arises.
First, parties may not spend adequate time endeavoring to negotiate and agree clear terms of their dispute resolution clause. The case of Internaves de Mexico S.A. de C.V. v. Andromeda Steamship Corp., et al. is illustrative.¹ The parties in this case signed a shipping contract in June 2016. In one section of the contract the parties provided they would arbitrate any dispute in New York, while elsewhere in the contract they provided for arbitration of any dispute in London. After Internaves claimed Andromeda breached the contract in October 2016, the parties first found themselves in Florida court fighting over the dispute resolution mechanism, specifically, whether they were obligated to arbitrate in New York or London. At first instance, the court concluded that the contract was ambiguous, and it could not determine where the parties had agreed to arbitrate the dispute.
The case went to the appellate court, which analyzed the issue more carefully under certain fundamental principles of Anglo-American common law contract interpretation: (i) the actual language used in a contract is the best evidence of the parties’ intent; (ii) where possible a contract should be read to give effect to all provisions and to make these provisions consistent with one another, but if any contractual provisions conflict and the contract itself expressly provides how to reconcile the conflict, the court is to apply the contract’s internal conflict-resolution method; (iii) if general provisions in a contract are qualified by more specific provisions, the latter are given controlling priority; and (iv) contracts should be interpreted with sensitivity to the reality that parties occasionally make errors or misprints when drafting a contract, which do not necessarily render the contract ambiguous.
Applying these principles to the shipping contract at issue in Internaves de Mexico S.A. de C.V. v. Andromeda Steamship Corp., et al., the appeals court explained that the designation of arbitration in New York was set out in a section of the contract containing general “boilerplate” terms (i.e., standard contractual language that is meant to be reused without significant variation in multiple contracts), while the designation of London arbitration appeared in a section that contained specific terms which the parties had negotiated and agreed. The contract also included language that, in the event any conflict existed between the general boilerplate terms and the specific terms, the latter were to prevail. Finally, the appeals court suggested that the parties may have inadvertently neglected to strike out the boilerplate text indicating arbitration in New York. After considering all these factors, the appeals court ruled that, despite the conflict in language regarding the place of arbitration, the contract was not in fact ambiguous and the parties were required to arbitrate their dispute in London, not New York.
Notably, the appeals court issued its decision in August 2018. In other words, because the parties had failed to specify clearly one place of arbitration in their dispute resolution clause, they were compelled to fight about this issue in court for nearly two years – all before they ever had the opportunity to address the substantive merits of the alleged contract breach that was the original basis of their dispute in October 2016.
A second mistake parties may make when drafting their dispute resolution clause is to make this clause overcomplicated. The situation in Safran Electronics & Defense SAS, et al. v iXblue SAS is illustrative.² In this case, the parties’ license agreement contained a dispute resolution clause that provided for arbitration in Paris for disputes concerning certain kinds of claims, and arbitration in New York for disputes concerning other kinds of claims (in brief the distinction turned on whether the claims arose from sales in one or another geographic location). Thus, unlike in Internaves de Mexico S.A. de C.V. v. Andromeda Steamship Corp., et al., here the parties intentionally allocated the resolution of certain claims to arbitration in one place (Paris), and the resolution of other claims to arbitration in a different place (New York).
A dispute arose between the parties, and Safran Electronics commenced arbitration against iXblue in Paris. Two weeks later, iXblue commenced arbitration against Safran Electronics in New York. Thereafter, in August 2018, Safran Electronics went to New York court to seek an injunction halting the New York arbitration while the Paris-based arbitrators considered their jurisdiction over Safran Electronics’s claims.
In a February 2019 decision, the New York rejected Safran Electronics’s request. The court explained that, as the parties had agreed to split arbitrations between Paris and New York depending on the claims in dispute, the court would not deny the New York arbitrators the authority to determine the scope of their jurisdiction over iXblue’s claims.
Based on the dispute resolution clause in the parties’ license agreement, it was entirely proper for the New York court to allow the New York arbitrators to determine their jurisdiction over iXblue’s claims (while the Paris arbitrators concurrently determined their jurisdiction over Safran Electronics’s claims). But this decision merely highlights the flaw inherent in the dispute resolution clause. By providing two places to arbitrate different claims in their disputes, it was virtually inevitable that Safran Electronics and iXblue would end up in two, parallel arbitral proceedings, first arguing over which claims should be addressed in Paris and New York even before the arbitrators separately might have the opportunity to consider the substantive merits of the claims. Added to this overly complex, cumbersome approach was six months of litigation before a New York judge, who simply confirmed what the parties had agreed in their contract.³
The decision in Safran Electronics & Defense SAS, et al. v iXblue SAS does not explain why the parties chose to arbitrate certain claims in Paris and other claims in New York (nor is there any reason to suppose that all these claims could not have been resolved in a single arbitration in one place). It is difficult to imagine, however, that any conceivable benefit outweighed the obvious and extensive inefficiencies of this approach.
3. Closing Thoughts
Drafting a dispute resolution clause, whether one that provides for litigation or arbitration, need not be a difficult exercise. As the cases of Internaves de Mexico S.A. de C.V. v. Andromeda Steamship Corp., et al. and Safran Electronics & Defense SAS, et al. v iXblue SAS show, however, the mistakes parties commonly may make are failing to give appropriate attention to negotiating and drafting the dispute resolution clause, on one hand, and making this clause overcomplicated on the other. As both cases also demonstrate, these mistakes can cost parties significant additional time and money that could have been saved had the parties adopted a more sensible and intelligent approach to drafting their dispute resolution clause at the outset.
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¹ Internaves de Mexico S.A. de C.V. v. Andromeda Steamship Corp., et al., 898 F 3d 1087 (11th Cir. 2018).
² Safran Electronics & Defense SAS, et al. v iXblue SAS, Memorandum Opinion 18-cv-7220 (LAK) (S.D.N.Y. Feb. 6, 2019).
³ Actually, the court case continued even longer as Safran Electronics appealed, but lost when the appeals court in October 2019 upheld the lower court’s ruling to deny Safran Electronics’s request for an injunction to halt the New York arbitration.
The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.