Yesterday, I participated in a phone call with a client and another lawyer in my office, Gerry Davis. We were discussing a worldwide software licensing agreement and I had brought in our best "tech" lawyer to assist. The counter-party had already provided a draft agreement to our client which our client had not yet sent to us. Fairly late in the discussion, I asked what law the agreement was calling for and then noted how that is oftentimes not as important as it is often made out to me. As I put it, as far as I know, in every country in the world, if you clearly say you will do something in a contract that is important to the contract and then you don't, you are liable for breach. I then asked what the contract said about where disputes would be resolved, at which point, Gerry said something about how my expertise is in dispute resolution clauses.
I know it makes me weird, but I kinda like that. ?
In a previous post, entitled, "Arbitration In Your China Contract. Adult Supervision Required," I talked a bit about my obsession with dispute resolution clauses:
With sushi restaurants, it's the yellow fin.
With new houses, it's the windows.
With international contracts, it's the dispute resolution provision.
The "it" I am talking about is the one easiest, fastest, most accurate, way to judge whether something is good or not. And the way I judge international contracts is by heading straight to the dispute resolution provision. The well crafted provision is, above all else unambiguous. If it calls for litigation, it says where it will be and what law will apply. And it says who will pay for it and under what circumstances. If it calls for arbitration, it says where it will be, how many arbitrators will be required, how the arbitrators will be chosen, the language of the proceedings, and the law that will apply. And it says who will pay for what.?
The above are minimums.?
I am heartened to see I am not the only blogger obsessed by these provisions. My friend, Santiago Cueto, of International Business Law Advisor, recently did his own post on international dispute resolution clauses, entitled, "7 Ways to Bulletproof Your International Arbitration Agreement."
My "problem" is that I have had to tell far too many companies (mostly American, with a smattering of European) that even though they have a great case based on the facts, the way their dispute resolution provision has been written will mean that pursuing their case will either be too expensive or too unlikely to succeed in actually collecting on any winnings.?
Hence the obsession.?
My firm is always handling international litigation and international arbitration matters. We are one of the few firms that takes such cases on a contingency fee or mixed fee basis, but we probably immediately turn down nine out of ten such cases referred to us and one of the most common reasons for our rejecting a case is because the dispute resolution provision has made actually collecting money too time consuming or difficult. ?
One of the things we love about pursuing litigation in China is the speed at which those cases usually proceed. We have handled (always using locally licensed Chinese counsel, of course) relatively complicated Chinese cases where we have been able to sue in China and get a judgment within three months. This on cases that would take three years in the United States. ?
I very recently discussed the differences between litigation in China and litigation in the United States in a Wall Street Journal article I wrote, entitled, "Chinese Companies Court Disaster" and in much greater depth in an article for Bloomberg Legal, entitled,?Suing Chinese Companies: The New Wave." [subscription required] For the full Bloomberg article, in serialized form, check out the following:
I am always marveling at how quickly litigation moves in China and I am often tout it as the fastest and best (and many times only) solution for obtaining injunctive relief against a Chinese company. Then again, we had one really big case in China where the judge obviously did not want to rule and for years, he just kept telling my client and the opposing party to settle it. ?
A recent China Blawg Post,?How Long Can a Litigation Proceeding Be in China??does a nice job pointing out how foreign company litigation in China can move really quickly, but definitely does not always. ?
Under China Civil Procedure Law, a domestic case is generally tried and completed within six (6) months for the trial of first instance starting from the date of successful filing of the case with the court, and within three (3) months for the trial of second instance (appellate court). However, for a foreign-related case, the Civil Procedure Law simply provides that such cases are not subject to such time limits as applicable to domestic cases without further prescribing how long such proceedings in respect of such foreign-related cases should be. In practice, such provisions are interpreted as that such lawsuits can be an open-ended proceedings.
Indeed. Very frequently, I am approached by international clients complaining that they get trapped in China courts due to prolonged legal proceedings with no idea when it comes to an end. And there are cases in which I represent foreign parties that have lasted much longer than six (6) months even though the case appeared not difficult. This has led to grievances on the part of foreign parties that often find that institution of a lawsuit in China has added salt to their own injuries.
The post then posits the solution in most situations?to be to "choose arbitration for dispute resolution in lieu of litigation in courts." The post then notes, however, that i"t is not that every foreign-related case has been protracted indefinitely. Courts in those big metropolitan cities in China, such as Shanghai, Beijing, may prove to be quiet efficient in some cases."
And that is the point.
The point is that in writing a contract, one must always think ahead in writing its dispute resolution clause and in each case, focus on what will likely be the best solution for the client. There is no one size fits all.?
I gave a speech the other day to the International Association of Outsourcing Professionals meeting on the legal issues involved in outsourcing to an emerging market country. In that speech, I had this to say about choosing the forum for your disputes:
How about putting in your contract that you can sue your Vietnamese vendor in the United States? You’d get your $3 million from them easy if you could sue here, right? Wrong. If you sue here, you might very well get a U.S. judgment for $3 million, but will you ever collect on it? Vietnam, China, Russia, even Japan: none of those countries will just take a U.S. judgment and turn it into a domestic judgment in those countries such that you will be able to enforce it against your vendor there.?
My firm constantly gets calls from American lawyers wanting to retain us to collect on a U.S. judgments they have received against Chinese or Russian companies. The American lawyers have usually charged their clients a pretty fair sum and they think all that is left for them to do is to take that judgment to a Chinese or Russian court. There, they think, they will get their U.S. judgment automatically converted into a Chinese or a Russian judgment and then they will get their money.
But it doesn’t work that way. Your United States judgment pretty much has zero value in either China or Russia, and in most other places in the world as well.
In fact, Chinese and Russian companies love it when you put a United States litigation requirement in your contract with them because they know that their own courts won’t enforce against them whatever judgment you may get. And even if you later realize that suing in the United States is not the way to go and you choose to sue the Chinese or Russian company in its home country, the court there will almost certainly toss your case out for being in the wrong jurisdiction because you signed a contract agreeing to sue in the United States.
So you have to be very careful not to write a contract that essentially blocks you from ever suing on it. And of course, on the flip side, if you put the United States in your contract as the jurisdiction for disputes, the foreign company can easily sue you right here.
Arbitration is oftentimes your best option and should in many cases go into your contract. Almost every country is a signatory to the New York Convention on Arbitration Awards, which means it will enforce U.S. and other foreign arbitration awards.
But arbitration has its shortcomings and sometimes you are better off putting a foreign court as your venue for resolving disputes. For example, if your biggest fear is your outsourcing company running off with your IP or your trade secrets, the fastest and best way to stop that is usually through the courts in the country in which your outsourcing company is based. Choosing the venue oftentimes comes down to figuring out the worst thing that could happen to you and then choosing the best venue for dealing with that.
You can read that entire speech here.
So what then is the answer as to what your contract with a Chinese company should be saying regarding where to pursue disputes? Chinese courts? The courts in your own country? Arbitration?
It depends....
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