Times are Tough, and the Tough may have to go to Court, or Arbitration! 12 May 2020

Times are Tough, and the Tough may have to go to Court, or Arbitration!

In this piece, and in a companion piece to follow[1], we address the “elephant in the room” of many of our recent Alerts. That is, what happens if the parties in any given business relationship are, for whatever reason, unable to resolve their differences in our now profoundly changed world?

Where a contractual dispute has been triggered by COVID-19, there will likely have been, through no fault of their own, a fundamental shift in the economic relationship between the parties. For example, one party will almost always be in a much better position, financially, to withstand the present punishing economic conditions. This is often the case with international Contracts where one of the parties from a country whose economy was already stronger before the pandemic.

Regardless, the parties to a dispute, preferably prior to any settlement negotiations, need to understand the Contract’s Dispute Resolution Provisions found in their contracts, which should be carefully reviewed, ideally with the assistance of experienced dispute resolution counsel. These Dispute Resolution Provisions can vary wildly, and usually favor one party over the other. Their impact must be understood and factored into the position any given party to a dispute intends to take in the negotiations to follow.

What does the Contract say?  

Most international Contracts will have, or should have, provisions setting forth both: (i) the Domestic Law to be applied when resolving any contractual disputes; and (ii) who, as the Trier of Fact and Law, will sit in judgment when resolving those disputes, i.e., a National Court or an Arbitral Tribunal.

While this may seem fairly straight forward, the possible variations are actually quite numerous. This is particularly true when the choice is Arbitration, which includes such additional considerations as which Arbitral Institution, if any, is to be used, the Location of the Arbitration, the number of Arbitrators making up the Arbitral Tribunal, the Language of the Arbitration to be used, etc.

In the following, we discuss two examples of Dispute Resolution Provisions found in the Contracts of Clients we are now advising about disputes triggered by COVID-19, both to provide examples of the tremendous differences one can find in these provisions and to contrast an unfavorable one, at least for our Client, with a, relatively speaking, unfavorable one.

Contracts providing for Dispute Resolution by National Courts

Out first example involves a Distribution Agreement to which our Turkish Client, the Distributor, is a party and who now finds itself embroiled in a serious dispute, triggered by COVID-19, with its counterparty, a Spanish Manufacturer. The Distributorship Agreement Dispute Resolution Provision reads as follows:

Governing Law and Jurisdiction: This Agreement is governed by Spanish Law. The Parties agree to the exclusive jurisdiction of the Courts and judges of the city of Barcelona for the resolution of any disputes arising out of the Contract.

As provided for in this provision, if the dispute is not resolved through negotiations, our Client would find itself in an unfamiliar Spanish Court, before a Judge who speaks Spanish and who may, perhaps unwittingly, be biased in favor of his fellow national, the Spanish Manufacturer. Our Client would also have to incur significant additional expense in order to participate in a case in a country far from home.

Given these disadvantages, our Client has far less leverage when working to resolve its dispute with the Manufacturer than it would have had if the provision been drafted more favorably in the first place.

Contracts providing for Dispute Resolution by Arbitration

The Lease of one of our Turkish Clients – who rents a retail space in Dubai and who is, as a direct result of COVOD-19, now involved in a serious dispute with its Dubai-based Landlord – provides as follows:

Governing Law and Disputes

This Lease shall be governed by and construed in accordance with the laws of the Emirate of Dubai, U.A.E. Any dispute arising out of or in connection with the Lease … shall be settled by arbitration in accordance with the Dubai International Arbitration Centre (“DIAC”) Arbitration Rules (“the DIAC Rules”) by a panel of three arbitrators appointed in compliance with the DIAC Rules.

Like the Distributor, our Turkish Client here, if unable to resolve the dispute, would find itself faced with unfamiliar law. But, importantly, resolution of the dispute would be before a much more likely to be neutral DIAC, where the Language would also likely be English and at least two of the three Arbitrators likely to be non-U.A.E. nationals[2]. Our Client here would also be spared the sort of expense our Distributor Client would need to incur, as our Renter Client already has a presence in the Dubai.

As a result, unlike the Distributor, our Client here has far fewer disadvantages with regard to dispute resolution, and thus has much greater leverage when working to resolve its dispute with the Landlord.

So, you have lousy Dispute Resolution Provisions. Now what can you do?

Disadvantages created by the unfavorable Dispute Resolution need to be factored into the analysis of the strength of your position if litigation or arbitration are unavoidable. Sometimes a party whose position is supported by the facts and applicable law will have that advantage seriously undermined by an unfavorable Dispute Resolution Provision. Better to take that into account early on, rather than to blunder into risky, and expensive, litigation or arbitration.

But there may be other options as well. For example, in a situation similar to the one our Distributor Client now faces – i.e., the prospect of having to appear before a Spanish Court – it would make sense, if settlement appears unlikely, to quickly locate competent Spanish counsel, who can advise you on the local law and, if necessary, could represent you before the Spanish Court if litigation turns out to be unavoidable. By doing so, many of the disadvantageous created by the unfavorable Dispute Resolution Provision can be eliminated, or at least mitigated.

And sometimes, although rarely, unfavorable Dispute Resolution Provisions can be challenged. For example, in 2015 the Turkish Court of Appeal considered a Dispute Resolution Provision in a Contract for the transport of certain goods from the U.S. to Turkey, which provided for “United States Law” to apply law and designated the “Court of Houston, South Texas, USA.” In that case, the transported goods were, allegedly, damaged when being loaded onto a ship in the U.S. prior to shipment to Turkey. An insurer of the goods subsequently filed a lawsuit in a Turkish Court, seeking $300,000 in damages.

The insurer appealed after a Turkish court of first instance dismissed its lawsuit, finding the lawsuit should have been filed in a “Court of Houston and resolved according to “United States Law.” The Court of Appeal reversed, finding the dispute resolution provision was unenforceable[3]. And it almost certainly was, given there is, for all practical purposes, no such thing as “United States Law,” or a least U.S. law that would apply to the dispute in question. In addition, the reference to a “Court in Houston” is decidedly vague, as it could have referred to either a Texas State Court or a U.S. Federal Court, both of which are found in Houston[4].

Regarding Dispute Resolution Provisions providing for Arbitration that perhaps can be challenged as unenforceable, consider what are known as “hybrid ad hoc arbitration clauses,” i.e., clauses which provide for arbitration before an Arbitral Institution, say, the highly-regarded Paris-based International Chamber of Commerce’s Court of International Arbitration (the “ICC”), but which, at the same time, provide for the use of another Arbitral Institution’s rules of arbitration, say, the DIAC Rules mentioned above. It is likely the ICC would refuse to accept an arbitration governed by a “hybrid” clause. See ICC Rules of Arbitration, Article 1(2)(the ICC “administers the resolution of disputes … in accordance with the Rules of Arbitration of the ICC”); but see Insigma Technology v Alstom Technology [2009] 3 SLR(R) 936 (arbitration clause providing for arbitration before the Singapore International Arbitration Centre, while using ICC Arbitration Rules, found enforceable).

[1] In the companion piece, we will be discussing both the force majeure and hardship “excuses” for non-performance of contractual obligations, or more accurately, with regard to hardship, for asking a court to order changes to a Contract in light of a “fundamentally” altered “equilibrium” between the parties.

[2] Similar to the rules of most arbitration institutions, the Rule 10.1 of the DIAC Rules provides, “[w]here the parties are of different nationalities, a sole arbitrator or chairman of the Tribunal shall not have the same nationality as any party …”.

[3] Yargıtay 11. Hukuk Dairesi, E.2015/5517, K.2015/12591, T.25.11.2015.

[4] In the U.S., each of its 50 States has its own law and court system, which operate in parallel with a country-wide Federal court system; Federal Courts have limited jurisdiction, and a relatively limited, albeit significant, body of law.

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