Article first published by Family Business Magazine in September 2018.
For any business litigation is an expensive and time consuming process. For small to medium sized businesses (SMEs), where time, money and staff are at a premium, the resolution of disputes in an efficient and cost effective way is essential. The litigation process is inevitably further complicated where the parties to the dispute are based in different countries.
In today’s global economy, particularly with Brexit approaching, many UK businesses are seeking to diversify into new and less familiar overseas markets.
Thought needs to be given at any early stage to what happens if a dispute arises. There is limited purpose in negotiating a lucrative contract with a new overseas supplier or customer if the obligations in the contract cannot be enforced.
When an international dispute arises it is necessary to consider at the outset which country's courts and law applies to the dispute.
Whilst most commercial contracts will contain a dispute resolution clause dealing with these points, too often this can be overlooked in the rush to get the deal done. Where no such clauses exist parties will be left relying on complicated rules and previous case law for resolving conflicts of law and jurisdiction issues. This lacks certainty and, worse, can lead to an SME facing litigation in an unintended overseas jurisdiction to protect its legal rights.
Whether a contract is governed by one country’s laws rather than another may mean the difference between total success by one party or total defeat. It may be the case that one country’s law does not recognise a particular cause of action or provides the defendant with a complete defence which is not available elsewhere.
For most SMEs exporting into new overseas markets the prospect of litigating in a different country before unfamiliar Courts applying unfamiliar local law in proceedings conducted in a different language is daunting.
There is an alternative. International arbitration is an established and increasingly preferred method of resolving disputes involving commercial parties in different countries.
Arbitration is similar to domestic court litigation, but instead of taking place before a court it takes place before private adjudicators known as arbitrators. It is a consensual, neutral, confidential and enforceable means of dispute resolution allowing parties from different legal, linguistic and cultural backgrounds to resolve disputes in a binding manner.
Arbitration will usually be quicker and more cost effective than litigation through the court. Limited grounds of appeal in arbitrations also provide finality and certainty for the parties.
The parties have great flexibility to decide on the methods by which the dispute is resolved, tailoring the procedure to their own requirements. The procedure can be as detailed or as short and simple as the parties decide. The parties can choose to adopt a set of pre-existing procedural rules prepared by organisations like the ICC or the London Court of International Arbitration or can agree their own bespoke procedure.
Arbitration allows the parties to agree where the dispute is heard, which law applies and what language the proceedings should be in.
This flexibility can result in significant costs savings. For instance, the parties can agree to limit or dispense entirely with exchange of evidence, dispense with an oral hearing and rely on written arguments only or avoid costly expert evidence by nominating an arbitrator from industry who has particular market expertise.
As opposed to litigation, arbitration falls outside of most of the issues Brexit creates particularly in relation to enforcement. This gives SMEs contracting now more certainty in the short to medium term as to how any potential future cross border disputes will be dealt with.
Court judgments are generally only enforceable in countries with reciprocal enforcement arrangements. By virtue of Regulation EU 1215/2010 (Recast Brussels Regulation) there exists a principle of mutual trust and recognition between the courts of EU members. This means judgments rendered by the UK courts are automatically recognised and enforced in other EU Member States, and vice versa. Brexit deprives the UK of the mutual applicability of EU Regulations which may create confusion regarding the enforcement in the EU of UK judgments.
Arbitration awards are enforced internationally under the New York Convention 1958 which will not be affected by Brexit. As a result an arbitration award can be readily enforced in some 150 plus countries who are party to the Convention.
It is important for businesses to include arbitration agreements in their contracts, so that if a dispute under the contract arises both parties are obligated to arbitrate rather than to pursue traditional court litigation. This can be achieved by a short standard clause.
It is possible for a dispute to be referred by agreement to arbitration after it has arisen. However, by that stage commercial relations may be strained and both parties will be seeking to pursue matters in the forum most favourable to their case.