I. INTRODUCTION

Dispute resolution is an important factor to consider in structuring any commercial contract. In the context of international business transactions, however, the importance of dispute resolution is magnified by the fact that the laws of at least two countries could apply to any given dispute. Given the potential for disaster when disputes arise between foreign parties, proper and detailed planning at the time of contract formation is essential to both resolving disputes effectively and avoiding disputes entirely.

There are a number of techniques for resolving disputes between business partners including litigation, arbitration, mediation and negotiation. Each route has its advantages and disadvantages, and depending on the parties' goals, can be the appropriate choice. In planning effective dispute resolution, the parties should consider three main issues: i) the choice of resolution procedure; ii) the selection of a proper forum; and iii) the choice of controlling law.

Over the past several years there has been an increase in the use of alternative dispute resolution procedures such as mediation and negotiation as a pre-condition to the more commonly used procedures of litigation or arbitration.

Mediation is a procedure in which a neutral third party facilitates negotiations between the parties. The general premise behind mediation is that the parties communicate their concerns to a mediator, who then attempts to structure a solution that is acceptable to both sides. Unlike arbitration, however, the mediator's decision is not binding on the parties. For this reason, it is imperative that the parties agree to keep confidential all discussions throughout the mediation process.

Negotiation or conciliation is a dispute resolution procedure in which the parties resolve the dispute themselves, with no involvement by a third party. This is obviously the least costly and most preferable alternative. As a practical matter, however, if the parties could settle things between themselves, there probably would not have been a dispute in the first place. It is a good idea, nonetheless, to include a conciliation clause in the contract such as the following, which requires the parties to make a good faith effort at negotiating any dispute before escalating to arbitration or litigation:

While these alternative dispute resolution procedures are increasingly being used, the two major resolution procedures continue to be litigation and arbitration.

Absent any contractual alternative, the only way to resolve disputes is by litigation. Litigation has both pluses and minuses, some of which may be modified by inserting appropriate clauses in the transactional documents. The following are some of those advantages and disadvantages:

1. Predictability and Correctability

Because of its public nature and the right of appeal, the results of litigation tend to be more predictable and correctable than arbitration. Judges must, at least in theory, follow statutory or case law in making a decision. Arbitrators, on the other hand, may - with virtual impunity - base their decisions on personal whim or compromise, rather than on law or the applicable contract. Only in the rarest circumstances can an arbitration award be overturned. The price to be paid for litigation's advantage in predictability is a high one, however, both in terms of dollar cost and delay. Significant commercial litigation may cost hundreds of thousands of dollars and last for years, as cases work their way up the appellate ladder.

There is also one major unpredictability about litigation: the forum in which the dispute will be tried. The litigation process permits a certain amount of "gamesmanship." All too often, one party to an international business deal suddenly finds itself faced with suit in a hostile, distant tribunal with strange procedures and rules. Negotiating a forum selection clause that would govern litigation between the parties is one answer to this danger. The parties, though, may want to go even further and bind themselves to arbitration or some other alternative dispute resolution mechanism.

2. Enforceability

Enforcement of judgments by the party prevailing in litigation may be a problem. The United States is not a signatory to any international convention on the enforcement of court judgments. Although U.S. courts generally enforce a foreign court's judgment on the basis of comity, a party trying to enforce a U.S. court's judgment in a foreign court faces more uncertainty. For example, some foreign laws do not permit the enforcement of a judgment if it remains subject to appeal. In addition, each foreign court will apply its own public policy criteria in evaluating the U.S. court's judgment.

3. When Arbitration Is Not An Option

Parties will be forced to litigate disputes if they cannot agree on arbitration terms. The choice of arbitration procedures may drastically effect the results of the procedure. Indeed, it may be more advantageous for a party to choose to litigate disputes rather than to give in on critical arbitration terms.

4. Multiple Party/Complex Disputes

Litigation may be the only choice when multiple parties are involved in a complex dispute. Litigation procedures are already designed to handle multiple party litigation. Rules of impleader and joinder can be used to bring necessary third parties into the litigation. Arbitration, by its voluntary nature, is not set up to force a third party into arbitration. While multiple party arbitration is possible, it is difficult to get all the parties to agree to a uniform set of procedures.

5. Winner/Loser Defined

One final advantage to litigation is the black or white nature of the judgment. Some situations, and some parties, dictate that a clear winner and clear loser be determined. For example, if one company has entered into many similar transactions with many different foreign companies, and a dispute arises with respect to one that could arise at some future date with respect to the others, that company may wish to litigate the dispute in order to have a court precisely define its legal position with respect to the remaining foreign companies.

In general, arbitration is a method of private dispute resolution in which the parties select a disinterested third party arbitrator to hear the facts of the dispute and to render a decision. Arbitration can be either institutional, in which the arbitration is administered by and conducted under the rules of an organization such as the International Chamber of Commerce ("ICC"), or it can be ad hoc, where the parties specifically design the manner in which the arbitration will be conducted. Whether it be institutional or ad hoc, there are similar advantages and disadvantages to this type of dispute resolution.

1. Less Cost and Delay

A major attraction to arbitration is that, in general, it is less than expensive and less time-consuming than litigation. A business dispute could be resolved within a few months or even weeks via arbitration, but a court suit might drag on for years. In addition to the normal costs associated with litigation, litigation in a foreign court requires the added cost of retaining local counsel. It should be noted, however, that -- for various reasons including the level of arbitrator's fees that the parties must bear -- arbitration can sometimes be as expensive as litigation. Even in an arbitration context, hotly contested disputes may flow in and out of court, as parties seek to avoid arbitration or challenge the award.

2. Enforceability

A significant advantage of arbitration over litigation in the international context is enforceability. Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"), signatories are required to enforce arbitral awards issued by other member nations. Currently, over ninety nations have signed the New York Convention, including the United States.

3. Control over Procedure

Arbitration also offers the parties the opportunity to exercise much more control over the dispute resolution process. Since submitting disputes to arbitration is voluntary, the parties can design the procedures to be followed in the arbitration. They can do this at the time the dispute arises, or in the initial contract through the use of an arbitration clause.

The parties can control inter alia: (1) where the arbitration will be held, (2) how the arbitrators will be selected, (3) what discovery will be allowed, (4) when the hearings will be held, (5) what law the arbitrators will apply, and (6) whether a detailed opinion must be written. Limitations on the discovery process, can, for example, reduce costs and delays normally associated with litigation.

4. On-going Commercial Relationships

Another major advantage to arbitration is that it is more conducive to continuing a commercial relationship with an adversary than litigation. Arbitration is less formal and its result can be considered a negotiated compromise. Typically, an arbitrator will hear both sides of the case and then render a decision that is based on all the facts, and often there will be no clear winner or loser. In effect it allows the parties to "save face." Litigation, on the other hand, fosters a formal, adversarial environment which tends to create lasting animosity between the parties.

In addition, arbitration is much more private than open court proceedings. For example, in a dispute between parties to an ongoing joint venture, the parties can avoid publicizing the dispute to competitors, customers, or suppliers by submitting the dispute to arbitration.

5. Arbitrators that are Experts

One final advantage to arbitration is that, because arbitrators are normally selected by the parties involved, they are more likely to be experts in the field relevant to an individual dispute. This may lead to more sound and reasoned decisions by arbitrators than by judges who are not experts.

D. Drafting Arbitration Clauses

Many of the issues involved in drafting forum selection and choice of law clauses for litigation also arise in connection with drafting arbitration clauses. As the U.S. Supreme Court has stated, "An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute."

1. Scope of Clause

When drafting an arbitration clause, the first thing to consider is what disputes the parties want to be covered by the clause. The clause can be tailored so that its scope can be very broad, covering virtually any dispute that arises between the two parties, or it can be very narrow, covering disputes arising in specific situations. Whichever is the desire of the parties, the scope of the arbitration clause should be clear on its face so that it can withstand any challenges. The following is the ICC's suggested broad arbitration clause: