INTERNATIONAL ARBITRATION and LITIGATION STRATEGIES: ARBITRATION vs. LITIGATION Malcolm S. McNeil, Partner Robert F. Kull, Partner Carlsmith Ball LLP Los Angeles, California October 30, 2007

THE BATTLE OF LAWS AND JURISDICTIONS

INTRODUCTION One of the essential functions of a contract is to provide a means for the enforcement of the parties’ promises in accordance with the terms of their agreement.

In the context of international contracts, issues of where and how an agreement may be enforced are key.  Uncertainty as to what law will apply in the event of a dispute and what forum will be available for its resolution can be reduced by advance planning.  Such planning affords the international practitioner an opportunity to both add value as well as manage client expectations with respect to disputes that may arise.

Nonetheless, even with careful planning, there are limits to the extent that uncertainty can be reduced:  Contractual choice of law and forum selection clauses may or may not be honored by the forum in which a dispute is heard due to the fact that each forum has its own jurisdictional rules, some of which cannot be overcome by a contractual choice.  Likewise, forums will apply their own procedural requirements and honor the parties’ chosen remedies in conformance with what is acceptable in the jurisdiction of the forum.

CHOICE OF LAW Where the parties have made a choice of law to govern in the event of future disputes, the question remains whether that choice will be respected by the forum charged with resolving the dispute.

Many jurisdictions, including the United States, allow contracting parties to choose the law applicable to govern their contractual rights and duties.

In the United States, most states decide choice of law issues in accordance with the Restatement 2d, Conflicts of Law § 187(a)-(b), which provides:  (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue;  (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied even if the issue is one which the parties could not have resolved by explicit provision in their agreement directed to that issue, unless…

. ….unless either: (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (b) application of the law of the chosen state would be contrary to the fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which…would be the state of the applicable law in the absence of an effective choice of law by the parties.

. Outside the United States, similar rules prevail in a number of other important financial and trading centers…

. …while a simpler framework has been proposed by international conventions that address the subject, such as: The 1986 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods; The 1980 Rome Convention on the Law Applicable to Contractual Obligations; and The 1994 Inter-American Convention on the Law Applicable to International Contracts  All of which contain nearly identical language recognizing that parties to an international contract may select the law applicable to the contract, in accordance with principles of “party autonomy” and without regard to the reasonableness of the parties’ choice.

CHOICE OF FORUM  The Hague Convention on Choice of Court Agreements, which concluded on June 30, 2005 after almost thirteen years of negotiations, was designed to eliminate, in large part, the uncertainty surrounding the enforcement of choice of law and forum provisions of contracting parties in member countries.

.  The Convention, which would be applicable to international commercial and civil disputes, requires the courts of member countries to assert jurisdiction in cases where they have been selected by the parties as the exclusive forum to resolve the dispute.

. Pending ratification of the Convention on Choice of Court Agreements by member countries, whether forum selection provisions will be enforced depends upon the rules applied by the forum deciding the issue.

Choosing a Neutral Forum?  Contracting parties may be tempted resolve forum uncertainty by selecting a neutral forum unconnected to the parties or transaction itself.  Yet where there is not enough of a connection between the defendant or the transaction and the chosen forum, the neutral forum may not agree that it should assert jurisdiction over a given dispute; and it may decline to assert jurisdiction.

.  Therefore, in preparing to draft an international agreement, consideration should be given to candidate forums’ approaches to issues of forum selection. (i.e. what is the likelihood that a chosen forum will agree with the parties that it is the appropriate forum for the dispute to be heard?)

.  Similarly, courts with the discretion to apply the doctrine of forum non conveniens may dismiss actions that they determine have too weak of a connection to the chosen forum.

The converse situation may also arise, to the frustration of the parties’ intent, where the parties or their deal only possess weak ties to their chosen forum:  Courts have also been known to assert jurisdiction in disregard of express contractual provisions designating a particular forum the exclusive forum where they find the designated forum’s connection to the dispute too attenuated.

.  When choosing a forum, the following factors may play a role in whether the designated forum will find that it has the requisite connection to the parties and contract at issue: the place of contracting; the place of negotiation; the place of performance; the location of the subject matter of the contract; and the residence, nationality, or place of incorporation/business of the parties.

. The likelihood of a contractual choice of law provision being upheld is greatly enhanced if the chosen forum is connected to the parties or the deal.

Arbitration?  Where the parties have agreed on arbitration as the means of dispute resolution, the likelihood that the chosen arbitrator or panel will decline jurisdiction may be less than the likelihood of a court doing so.  Despite this apparent advantage of arbitration, arbitration may not be the best forum for the particular parties or transaction.

The advantages of arbitration are said to include the following:  Knowledgeable arbitrators: in specialized areas, arbitrators can be more knowledgeable than judges; on the other hand, arbitrators who have a lot of experience in an area may have their own biases and predispositions that they bring to the dispute.  Confidentiality: particularly important in cases involving trade secrets and other sensitive, proprietary information.  Quicker and/or more efficient proceedings: arbitration can be quicker and more efficient than courts; but it can also be the opposite, particularly depending on what arbitral organization is chosen;  Easier enforcement: one of the main reasons why parties choose arbitration is to facilitate enforcement of an award;  More congenial and/or relaxed atmosphere: arbitration may be procedurally simpler than litigation as well;  Forum neutrality: instead of the “home courts” of one of the parties.

Disadvantages to arbitration, however, include the following:  Arbitration can be expensive: proceedings may drag on longer than court proceedings; and arbitrators, unlike judges, are paid for their time and expenses by the parties to the dispute;  “Splitting the baby”: arbitrators have a reputation for giving Solomonic awards in attempts to achieve fair results without exactly following the letter of the law; and  Limited relief: arbitrators have a limited ability to grant interim measures of relief.

. Whether arbitration or a choice of court provision is agreed upon, careful attention must be paid to the wording of the chosen clause as even subtle differences in wording can lead to very different ramifications as applied.

.  For example, language that the chosen forum shall hear “any disputes arising under the contract” may be found to apply to a much narrower set of claims than the alternative construction, “any disputes arising under or relating to the contract.”

. Parties who want to limit arbitration to only contractual disputes or to events that occur within a particular time period would, therefore, seek the narrow construct and avoid a “standard” arbitration clause written so broadly as to confer jurisdiction on the arbitrator of the equivalent of “[a]ny and all controversies,” including issue of whether a particular dispute is arbitrable.

ENFORCEMENT OF AWARDS The Hague Convention on Choice of Court Agreements provides solutions to problems often encountered when seeking enforcement of foreign court judgments. It mandates that member states recognize and enforce the judgments of other member states; and precludes their review of the underlying merits of the judgment.

Recognition or enforcement may be refused by member countries only in specified circumstances, including: 1.Where the judgment is the subject of review in the State of origin; or 2.If the time limit for seeking ordinary review has not expired; or 3.Where the parties’ contract was null and void under the law of the State of the chosen court, (“unless the chosen court has determined that the agreement is valid”); or

4. Where a party lacked the capacity to conclude the agreement under the law of the requested State; or 5. Where the document which instituted the proceedings or an equivalent document, including the essential elements of the claim, either: (i) was not notified to the defendant in sufficient time and in such a way as to enable him to arrange for his defense; or (ii) was notified to the defendant in the requested State in a manner that is incompatible with fundamental principles of the requested State concerning service of documents; or

. 6. Where the judgment was obtained by fraud in connection with a matter of procedure; or 7. Where recognition or enforcement would be manifestly incompatible with the public policy of the requested State, including situations where the specific proceedings leading to the judgment were incompatible with fundamental principles of procedural fairness of that State; or

8. Where the judgment is inconsistent with a judgment given in the requested State in a dispute between the same parties; or 9.Where the judgment is inconsistent with an earlier judgment given in another State between the same parties on the same cause of action, provided that the earlier judgment fulfils the conditions necessary for its recognition in the requested State.

CONCLUSION  The above exceptions illustrate that while the Convention on Choice of Court Agreements may bring added certainty to the current framework for international dispute resolution, the Convention’s application may be skirted by parties who shoehorn their claims to fit within its exceptions…

Such planning on the part of the international practitioner will serve to not only manage client expectations with respect to potential disputes; well- chosen choice of law and forum provisions also may protect the careful allocation of risks provided by a contract’s substantive provisions. Consideration of choice of law and forum-selection issues, therefore, will be required for time to come.

* THE END

By Robert F. Kull Carlsmith Ball LLP 444 South Flower Street, 9th Floor Los Angeles, CA Tel: (213) Fax: (213) or…

Malcolm S. McNeil