Cross-border litigation issues to consider when structuring international transactions

December 2014 | PROFESSIONAL INSIGHT | LITIGATION & DISPUTE RESOLUTION

Cross-border business seems simple and no different from domestic business until something goes wrong. A good business practice is to assume that things will go wrong and then minimise the risk anticipatorily in your agreement. This article will provide a brief overview of litigation issues to be aware of so that you can spot them and do something about them when structuring a cross-border transaction.

Here are four key strategies to keep in mind. First, consider consulting with local counsel in the foreign countries involved in the transaction. While experienced counsel may spot issues pertaining to another country, having a local counsel involved will help you navigate through them without missing fundamental issues. Second, make sure your team includes someone who has expertise in dispute resolution issues in international transactions. Many transactions fail because one side did not correctly anticipate whether the dispute provisions will result in the other side not performing. Third, make sure that dispute resolution issues are brought into the early stages of the negotiating and drafting process. Waiting until the end typically means that this key part of the transaction is not thought through and your negotiating power is diminished. Fourth, do an analysis of the likely dispute resolution issues and strategies for each side. For example, which side is more likely to fail to perform? Implementing these four simple strategies will help make your international transaction work the way you want it to work.

Basic contract considerations

Consider the possible ambiguities arising from the international dimension of the transaction. Identify them and address them up front. Otherwise, they will be like a time bomb waiting to go off. Also, take the necessary time to make the contract clear regarding international issues. This can become complicated even if you are aware of the issues. Avoid the tendency for the dealmakers to rush the deal and shortcut this process. An international transaction with problems will almost always be much harder and more expensive to fix later on than during the negotiating and drafting stage.

Language issues

If you need or want the contract to be in more than one language then spend the time to do it right. If more than one language is to be used, make sure the contract specifies which language controls. Make sure that the translation says what you believe it says. Take the time to determine that the contract is in a language that will be enforceable in a foreign court where a party is located. For example, a perfect looking contract will not work if it is not in the language that a local court will require for enforcement.

Strategise – control as much as you can of the dispute resolution issues

Be aware of what issues may arise if a dispute has to be litigated. If you are aware of the issues early on in the negotiation process, you can strategise and control the dispute resolution issues so that the transaction will work as you intended. Issues to be aware of include, among other things, venue issues, choice of law issues, enforcement of judgment issues, enforcement of arbitration award issues, mediation issues, service of process issues, and personal jurisdiction issues.

Venue issues

Where, in terms of physical location, do you want to resolve any problems? Do you want a dispute to be heard on your home turf or on the other side’s home turf? A venue provision that may not be enforced by a court is often known from the beginning by the other side. Do you have to agree to a neutral location for any disputes? Do you agree on reciprocal locations depending on who initiates the dispute, i.e., the party initiating a dispute has to bring the dispute in the location of the other party? If so, make sure you know what may happen if there is a dispute in those venues.

Venue strategy considerations include whether or not there is a favourable forum for either party. Consider which of the parties is more likely to cause a dispute and which wants more to have the contract enforced. What substantive and procedural law may be applied in the chosen venue? Are there any differences between arbitration as opposed to litigation in the venue? If you may need provisional remedies, such as a preliminary injunction to protect trade secrets, will your venue allow you to obtain and enforce the provisional remedies? Are there any enforcement of judgment or arbitration award peculiarities in the venue? Are forum selection clauses presumed valid and enforced in the venue? Understanding the answers to these questions will allow you to be strategic.

Choice of law issues

Strategy considerations include knowing the differences between the domestic laws in the countries of the parties. Consider consulting with local counsel in the countries involved. Consider again who is more likely to cause a dispute. Would the choice of law in the contract even be applied in the venue selected? If no choice of law provision is used, which law may govern by default in different venues?

How do you want to solve a problem – litigation or arbitration?

Depending on the country, litigation may allow discovery, trial by jury, provisional remedies, and a right of appeal.

Arbitration is traditionally faster and cheaper (but not always), private, with no jury, may not have discovery (except documents), can be customised and binding, and there is generally no appeal.

Other considerations when choosing between litigation and arbitration include enforcement of judgment and arbitration award issues. Consider whether a judgment entered in the agreed venue will be enforceable in the courts of the other parties to the agreement. Also consider whether a judgment entered in the local courts of the other parties will be enforceable in your country. Again, consider consulting with a foreign lawyer from the countries at issue. Generally there are no treaties for recognition and enforcement of judgments and courts can be unpredictable. Costs for recognition and enforcement of a foreign money judgment may also be time consuming and expensive.

On the other hand, an international arbitration award will likely be subject to the 1958 New York Convention on the Recognition and Enforcement of Arbitrable Awards. It requires courts of contracting states to give effect to private agreements to arbitration and to recognise and enforce arbitration awards made in other contracting states. Unlike enforcing judgments, the protocols for recognition are more uniform, less time consuming and less expensive. Approximately 150 countries have adopted the New York Convention (Taiwan is the only major industrial country that has not adopted). International arbitration is now a conventional method of international dispute resolution and is often chosen due to its more predictable recognition and enforcement if there is a dispute in a cross-border transaction.

Spend time and think through any arbitration clause. Strategise which arbitration organisation to select, which arbitration rules, and whether the contract should provide its own customised rules. For example, addressing discovery needs or privilege and evidence issues. These are just some of the issues to consider.

You should also consider building a mediation process into your agreement. A mediation provision can provide that all of the parties at the outset intend to cooperate in good faith and work to keep the transaction alive. Mediation may also be cost effective and keep the business relationship from disintegrating when there is a dispute.

Jeffery J. Daar is a principal at Daar & Newman, PC. He can be contacted on +1 (818) 615 0999 or by email: jdaar@daarnewman.com.

Jeffery J. Daar

Daar & Newman, PC