By Joshua Levin-Epstein, Esq.
Dealmakers involved in cross-border transactions should note that contractual provisions concerning dispute resolution procedures, forum selection clauses, and choice of law clauses—which are usually found at the very end of contracts are more important than their placement indicates; these clauses should not be treated as an afterthought! The consideration and negotiation of dispute resolution mechanisms in cross-border transactions is understandably far more challenging than in domestic transactions because issues of foreign judgment enforcement and judicial bias are inherent in cross-border transactions and will inevitably surface. Due to the nature of cross-border transactions, the possibility of having to enforce a foreign judgment and judicial bias must be at forefront of dealmakers’ deliberations. This article discusses the main issues in the deliberation of the type of dispute resolution procedures in cross-border transaction agreements.
As in domestic transactions, the negotiation of dispute resolution procedures in cross-border agreements center on the advantages or disadvantages of litigation versus arbitration. The critical difference between the consideration of the pros and cons of dispute resolution mechanisms in domestic transactions and cross-border transactions is that for international deals litigation may be a far less practical or viable option. The unfamiliarity of foreign courts’ administrative and evidentiary procedures and the questionable impartiality and fairness of certain foreign courts and judgment enforcement mechanisms are substantial factors in the decision to incorporate arbitration clauses in cross-border transactions.
The main benefits of arbitration for cross-border transactions are (i) the relative speed and short timeline of the proceeding compared to conventional international litigation, (ii) the ability to select a highly qualified arbitrator or panel of arbitrators, (iii) the ability to select a neutral forum, and (iv) and the application of standard rules and procedures in credible arbitration tribunals. Through the selection of arbitration, the parties significantly lessen the possibility of the neutral’s geographical bias.
The selection of arbitration over litigation is not necessarily an obvious choice for cross-border transactions, however. The high cost of arbitration, which includes the arbitrator’s fees and the costs of the arbitration organization itself, and the finality of the arbitration award are substantial factors that weigh against arbitration. The possibility of an incorrectly decided arbitration award is the most prominent concern because of the extraordinary difficulty in appealing arbitration awards. For the most part, the likelihood of successfully appealing an arbitration award is very low and dealmakers should understand and appreciate that the arbitration proceeding is generally the only forum for the adjudication of the dispute. Unlike in conventional litigation, which includes the possibility of multiple layers of appeals, the successful appeal of an arbitration award is generally limited to a gross abuse of due process and is considered rare.
The due diligence process with respect to arbitration must also take into account the specter of the enforcement of the award in a foreign jurisdiction. Even though international arbitration is the status quo in cross-border transactions, there are certain jurisdictions that are still reluctant to enforce international arbitration awards and the laws in foreign jurisdictions vary greatly on the procedures and tools to unearth hidden assets. Therefore, it is critically important that the due diligence process covers the process and likelihood of turning an award into an actual financial recovery.
The worst case scenario of an insolvency proceeding in a foreign jurisdiction must also be taken into consideration. The substantive differences in insolvency laws in foreign jurisdictions profoundly affect the possible outcome of a financial recovery. For example, unlike in the United Kingdom, the United States federal bankruptcy laws do not recognize the legal concept of “deepening insolvency,” which requires euthanization of insolvent companies. The legal definition of the term “insolvency” also varies in critical respects as countries such as Norway and Spain deem companies with the inability to offset debts with assets as insolvent. Therefore, in the cross-border due diligence process, dealmakers must understand the nuances of the foreign insolvency laws to understand the risks of a foreign insolvency.
The importance of choice of law provisions and the dispute resolution procedures are key deal term issues that are worthy of serious consideration. The failure to properly account for the differences in foreign law and the appropriateness of arbitration or litigation in particular circumstances may have unintended consequences.
At Shiboleth LLP, we have successfully litigated several international arbitration cases on behalf of our clients. We would be happy to speak to you about any issues relating to international litigation arbitration.