The following is a guest post from Joe Jones providing insight on drafting dispute resolution clauses in supply chain contracts and determining which provisions will work best for you.  This will be the first of many blog posts by Joe where he will discuss topics related to drafting and negotiating supply chain contracts.  Joe is based in our Washington D.C. office where he specializes in cross-border corporate transactions, antitrust/competition review, foreign investment clearance procedures and other regulatory matters.

Contract Review

What’s in Your Dispute Resolution Clause? Six Ways Dispute Resolution Clauses Impact Supply Chain Contracts

The dispute resolution clause doesn’t get much respect in many supply contracts. It is usually found close to the end, far beyond the point where the average reader stops paying attention. Many negotiators simply insist upon using their home jurisdiction’s local courts or a local arbitration tribunal for dispute resolution—often at the term sheet stage, and often without input from a legal professional who has seen the proposed transaction. That’s not always a good idea. At best, it can result in a suboptimal situation when a problem arises; at worst, it can make the entire contract unenforceable.

Here are six practical ways that the dispute resolution clause can have an impact on your contract:

1. Avoiding a useless judgment. One big reason not to simply insist upon using your own “home court advantage:” court judgments (and especially U.S. court judgments) are usually enforceable in the court’s own jurisdiction, but are often difficult to enforce in other countries. For example, if you obtain a judgment in a New York court against a company that only has assets in a foreign country, you will almost certainly need to go to court again in that foreign country in order to force a payment. If that country’s courts are friendly, you will only need to re-litigate part of your case abroad; if that country’s courts are not friendly, you may have a completely unenforceable judgment. Arbitral awards tend to be more “portable” and easier to enforce thanks to international agreements like the New York Convention, but may also be unenforceable in certain jurisdictions and circumstances, depending upon local law and treaties.

2. Keeping things quiet (or public). Courts are typically open to the public. Documents submitted to a court may be easily accessible to the public. Court decisions may be published, reported in the news, and studied by future generations of law students. Parties concerned about confidentiality tend to prefer arbitration, which usually occurs behind closed doors and does not result in a published verdict.

3. Full discovery, limited discovery, or none? Courts in the United States generally offer a process of discovery, by which parties can demand the production of vast amounts of evidence. Some arbitration rules also permit discovery, and carefully written arbitration clauses can even provide for customized discovery rules. For plaintiffs who may not have definitive evidence in hand when they do so, the availability of discovery can be a blessing. For defendants, discovery can be an immense burden that is better avoided or limited by using arbitration, or choosing a court outside the United States.

4. Slowing things down (or speeding them up). Many contracts call for disputes to be resolved by escalation to senior executives, followed by mediation for a certain period, followed by arbitration or litigation. This can be useful for avoiding costly proceedings, but can also add unnecessary delay and cost to what would otherwise be an inevitable prompt judgment. Once the final stage is reached, the speed of a court case can vary dramatically between countries, and even in different regions of the same country. If the only alternative is a very slow litigation proceeding, arbitration might be an attractive option.

5. Providing options (or taking them away). Dispute resolution clauses may provide for “exclusive” jurisdiction, stipulating a single agreed venue for all disputes. This tends to be good for potential defendants as they know exactly where they will be sued. On the other hand, potential plaintiffs might be better off with “non-exclusive” jurisdiction, which essentially gives them the option to choose the most beneficial venue for their claim.

6. Choosing the language. Courts almost always conduct proceedings in the official language of their country’s legal system. Arbitration, on the other hand, can often be conducted in any language. This can be of great benefit in cross-border contracts, where the parties may not want a court to rely upon a poor translation of the contract or the supporting evidence.

That’s a lot to consider. So what should you do? Consider your situation carefully. If your side is likely to become a plaintiff in a dispute, you should consider which dispute resolution mechanisms and venues would give you the most leverage over the defendant. On the other hand, if your side is likely to become a defendant in a dispute, you should consider which mechanisms and venues would reduce the plaintiff’s leverage over you.

That’s easy to say, but hard to do: the same party may find themselves in either position. For example, a supplier may become a plaintiff if their customer fails to pay, a customer may become a plaintiff if they have a warranty or indemnity claim, and either side might have confidentiality or exclusivity claims. One must know the facts of the transaction and its parties quite well in order to figure out what issues are likely to result in a dispute, and who would initiate that dispute.

Sometimes, there is no particularly good solution to the dispute resolution question; sometimes there are several viable options, and other considerations like cost, convenience, and familiarity can drive the decision. But in any event, dispute resolution is a point that business and legal teams should consider carefully when preparing cross-border supply agreements, as it can ultimately make the contract much more costly or much less effective when a dispute arises.