Choosing court or arbitration in contracts?

Court or arbitration in contracts? Many contract drafters base their choice on hearsay or one or two bad experiences in arbitration. There are important factors that should drive your decision, however. But not myths. The principal question is whether disputes should be settled in court or by means of arbitration.

Decisive factors for choosing court or arbitration #

The important decisive factors for arbitration instead of public court proceedings are:

• Enforceability of a decision. Arbitration is almost inevitable if there is no treaty between the countries in which the final decision must be executed and the country of an agreeable court (e.g. a convention for the enforcement of foreign judgments, such as the Convention of Lugano or the ‘Brussels Regulation’). The New York Convention of 1958, facilitating the enforcement of arbitral awards, has been ratified by an impressive number of countries.
• Confidentiality. In arbitration, even the existence of a dispute is secret. If this is important, it may be desirable to provide that the arbitration institute will not publish the arbitral award (or at least not any identifying elements of the case).
• Greater expertise of arbitrators. The parties may provide for effective appointing rules to establish the arbitral tribunal. Even if the parties did not provide anything on the nomination or appointment of arbiters, an arbitration institute will likely consider the desirability of bringing a true expert ‘on board’.
• ‘International’ approach of a dispute. In court procedures, the foreign party will likely feel uncomfortable and uncertain about the somewhat patriotic or chauvinist attitude the court may take vis-à-vis its local counterpart. Also, in arbitration, the tribunal may be more receptive to international quality standards or service levels and transnational best practice rules (e.g. Lex Mercatoria) and less amenable to formalities required by the applicable law.
• Speed, although arbitration is sometimes slower. This argument is often misplaced. It is not generally true that arbitration is slower than court proceedings. On the contrary, in some countries civil procedures are considerably slower or much more burdensome.
• Adaptability of the arbitral procedure.

Whatever the parties agree, they should certainly not provide for arbitration and a choice of court at the same time. Also, if the choice is made for arbitration, it is highly unusual to provide for a right of appeal (not even in a court) and the decision not to choose arbitration should not be driven by the lack of such right of appeal.

Choice of court clauses #

Policy decisions. If the decision to prefer court or avoid arbitration proceedings is made, a choice of court provision is appropriate. In essence, the ‘political’ questions asked in connection with a choice of court provision in commercial contracts are:

• What is the best choice in order to ascertain the continuation of business as much as possible?
• Should we discourage court proceedings by providing for an unattractive procedure? Alternatively, do we need to have an expeditious court decision?
• Is a carve-out for certain action desirable (e.g. the right to seek protection under applicable intellectual property laws in a different jurisdiction)?
• Where should we engage a law firm?

The answers will probably follow from some very general observations of each party’s probable interests and power to settle disputes amicably. A Dutch in-house legal counsel will probably find that a counterparty will be inclined to compromise on German or French courts (as if a football team were sentenced by the UEFA to play its home matches outside its home country).

Exclusive jurisdiction in a choice-of-court clause.
A choice of court is typically made under the assumption that the choice excludes the international jurisdiction of other courts. Making this explicit is not necessary: both the Brussels Regulation and the Lugano Convention (i.e. the regulation’s counterpart for non-EU member states) determine that in the absence of such an express stipulation jurisdiction of the appointed court over any dispute is exclusive. Since U.S. courts do not recognise the scope of the Regulation or the Convention and it requires only one word, including the word exclusive is recommended.

Relative jurisdiction and choice-of-court clauses.
Normally, it is not necessary and potentially a source of confusion to express which level of court jurisdiction (relative competence) applies. It is unnecessary because local civil procedural law will determine what relative jurisdiction applies (and it does not always permit the choice); it can be a source of confusion if at the time of a dispute it appears that the drafter did not intend to choose the relative jurisdiction but rather was trying to be too clever. The parties might find themselves having precluded a right to appeal (e.g. because they appointed a Court of Appeals).

U.S. particularities and choice of court.
If a U.S. court is appointed, there exists a possibility that court proceedings could be initiated in a federal court instead of a state court. In short, federal courts may have jurisdiction in matters where (federal-U.S.) interstate aspects come into play and, amongst others, in matters related to bankruptcy or intellectual property rights (both these legal areas are subject to federal legislation).

Another particularity would be to exclude the right to demand a jury trial. This right might also be invoked in other jurisdictions, depending on national law. The arguments in favour of arbitration (see the preceding paragraph (a)) apply here as well, especially when it comes to speed of the procedure and expertise (quod non) of the jury. Note that under several U.S. state laws, such exclusion must be made conspicuously (i.e. printed in all caps), because it is a deviation of each person’s constitutional right to have a jury try the facts of a dispute (and not the court itself). An example of such waiver is:

EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

Or with more certainty that the waiver is effective:

EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF SUCH ACTION, SUIT OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.