Managing Disputes at the Drafting Stage

In Part 1 of this Technology and Outsourcing Hot Spots series, we mentioned the importance of managing disputes from as early as the contract drafting stage. We considered that parties should ensure an accurate translation of their agreed obligations and scope of work into the formal contract, thereby avoiding disputes involving erroneous or unspoken expectations.

This is also an appropriate mindset for the drafting of dispute resolution clauses. A properly drafted dispute resolution clause gives parties an appropriate dispute resolution mechanism, allows for an enforceable decision and avoids costly and time consuming jurisdictional fights prior to the determination of the substantive dispute.

ADR for Infocomms Disputes

There are distinct advantages to resolving infocomms disputes through ADR (whether mediation or arbitration or a combination of both) as opposed to litigation in the courts.

First, parties have the freedom to appoint specialist mediators/arbitrators e.g. eminent lawyers, retired judges or even experts in the field of IT project development or in the specific technological field that is in dispute. In litigation, parties are unable to choose the judge hearing their dispute. There is therefore no certainty that the judge appointed has the necessary experience and technical expertise to properly determine the dispute.

Second, arbitration also gives parties more control over time and costs than in litigation. Most of these savings in arbitration are derived from the fact that parties and tribunals are not bound by the strict rules of procedure of the court or by its caseload/timetable.

Awards rendered in arbitration are final and generally not subject to an appeal on the merits. There are only limited grounds for setting aside the awards, or for courts to refuse to recognise and enforce them.

These time and costs savings can sometimes be even more substantial in mediation. A successful settlement avoids a formal hearing on the substantive merits of the case. Mediation is a more formal and structured process than negotiation. In a mediation, a trained, impartial third party (the mediator) tries to help the parties reach a consensus on the substantive issues in dispute.

A mediator does not have the power to issue a determination which binds the mediating parties. Nevertheless, where parties have come to an agreement, that agreement can be embodied in the form of a formal written settlement agreement which can then, if necessary, be enforced against the parties in the event of non-compliance.

Another hallmark of ADR is that it gives parties the opportunity to ensure the confidentiality of its processes and of the information produced in the course of the hearing. The most immediate benefit is in maintaining the confidentiality of any trade secrets, intellectual property or other confidential and commercially sensitive information from entering the public domain. In litigation, all proceedings and documents are a matter of public record.

A considered and properly drafted dispute resolution clause will also ensure that the confidentiality in ADR also extends to the fact that the very existence of the arbitration itself is confidential. This avoids negative commercial publicity and is conducive in maintaining the working relationship between the parties.

Finally, thanks to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has 146 state parties, it tends to be much easier to enforce a foreign arbitral award than a foreign court judgment. In contrast, domestic legislations to enforce foreign court judgments tend to involve much fewer countries.

In Singapore, there are only 11 countries (UK, Hong Kong, New Zealand, Sri Lanka, Malaysia, Windward Islands, Pakistan, Brunei Darussalam, Papua New Guinea, India (except the State of Jammu and Kashmir) and Australia) from which judgments of their superior courts may be registered in Singapore under the Reciprocal Enforcement of Commonwealth Judgments Act (Cap. 264) or the Reciprocal Enforcement of Foreign Judgment Act (Cap. 265).

While there is a wider scope for the enforceability of foreign court judgments in the UK, major countries and trading partners such as Brazil, China, Japan, South Korea, Russia and the United States are not covered by legislation or any treaty which would entitle their court judgments to be enforced directly in the UK and vice versa.

This is not to say that foreign court judgments cannot be enforced in the absence of some treaty or legislation. They can, but the procedures and preconditions involved tend to be more onerous, restrictive and time consuming than in enforcing a foreign arbitral award.

Drafting Dispute Resolution Clauses

Given the likely complexity of disputes that arise out of technology and outsourcing disputes, it is important to ensure that the dispute resolution clause is properly drafted. This ensures that parties get the type of dispute resolution mechanism that they want, that is, an enforceable decision at the end of the hearing, while avoiding costly jurisdictional fights and delays prior to the substantive hearing.

The most common problems that parties face are a lack of clarity as to whether disputes have been properly submitted to arbitration and/or whether the courts still have jurisdiction to determine the dispute. In a similar vein, even if the courts have jurisdiction over the disputes at hand, it is not always clear which national courts have such jurisdiction.

In the case of the former, the party who wishes to initiate arbitration or who has already initiated arbitration might find itself in court as it attempts to persuade the court to stay its proceedings in favour of arbitration. In the latter situation, a party who has initiated litigation in one national court could find itself on the receiving end of an application for those proceedings to be stayed and/or subject to an anti-suit injunction so that the dispute is litigated in another forum instead.

In the worst case situation, a party who has the benefit of an arbitral award might find the award set aside or that a court refuses to recognise and enforce the award on the basis that there had no arbitration agreement between the parties, or that the tribunal had lacked jurisdiction to determine the dispute.

There are several issues that parties ought to consider when drafting dispute resolution clauses. This post considers only one of those issues – the multiple laws at play in an arbitration. Our next article in this series will consider the use of multi-tier and unilateral arbitration clauses.

Multiple Laws

We have dealt with this issue more extensively in a previous post. In Law and Practice of International Commercial Arbitration, the learned authors of the text identified “at least five different systems of law which in practice may have a bearing on international commercial arbitration” (Redfern and Hunter, Law and Practice of International Commercial Arbitration, 4ed., 2004 at [2-04]). These are:

1. the law governing the capacity of the parties to enter into an arbitration agreement;
2. the law governing the arbitration agreement and the performance of that agreement;
3. the law governing the existence and proceedings of the arbitral tribunal – the lex arbitri;
4. the substantive law or the proper law of the contract; and
5. the law governing recognition and enforcement of the arbitral award.

These distinctions arise out of (i) the fact that the parties to the dispute may not have any connection to the law they have chosen to govern their contract and (ii) a further recognition that the arbitration agreement is a separate and distinct agreement from the underlying contract to which the arbitration agreement is commonly one of the clauses.

Laws 1 and 5 are rarely in dispute. The law governing the capacity of the parties to enter into an arbitration agreement is generally that of the law governing the place of incorporation of the corporate entity or the domicile of a natural person. The law governing recognition and enforcement of the arbitral award is the law of the place in which the award is sought to be set aside, recognised and/or enforced.

However, disputes often revolve around laws 2, 3 and 4. These are often governed by one and the same law i.e. the substantive law of the contract is often the same law which governs the arbitration agreement and the arbitration process.

However, there can be convoluted exceptions, as was the case in the recent English Court of Appeal decision of Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others, [2012] EWCA Civ 638. An earlier post sets out the facts and legal reasoning of the case. To summarise, the two insurance contracts in issue contained an arbitration clause for disputes to be resolved by arbitration seated in London. However those same contracts also contained an express choice of Brazilian law as the governing law of the contracts as well as an exclusive jurisdiction clause in favour of the Brazilian courts. The Court of Appeal held that the arbitration agreement (and the lex arbitri) was governed by a law (English law) that was different from that chosen to govern the substantive obligations of the underlying contract (Brazilian law).

The decision of the English Court of Appeal had real repercussions. According to the party arguing that Brazilian law was the governing law of the arbitration, Brazilian law would have required their consent to commence arbitration. In contrast, English law would have considered that the arbitration clause(s) constituted an agreement on their part to submit to arbitration and that no further consent would have been required to commence arbitration.

Our next article in the series will consider the use of multi-tier and unilateral arbitration clauses and in particular, what they are and what are the benefits and drawbacks for parties who might contemplate incorporating them into the main contract.