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Legal » Apr/May 10

Cross-border joint ventures – getting the dispute resolution clause right

International joint ventures are a common feature of the natural resources industry and reflect the increasing globalisation of international business relationships. By their very nature, international joint ventures raise a number of different considerations to those between domestic parties. These include deciding where to locate the joint venture vehicle, the possibility of using different legal vehicles in different jurisdictions and taking into account the possible restrictions on foreign investment and control. Another issue of equal importance, but which can sometimes be over-looked, is the need to choose an appropriate law and forum for the resolution of disputes.

Why is it important to include a dispute resolution clause?

Given the possibility of a dispute arising at some stage between joint venture parties, it is crucial to give adequate thought in advance to the dispute resolution provision included in the relevant agreements. Failure to agree a suitable dispute resolution forum and procedure could have significant implications in the case of an eventual dispute.

In the context of an international joint venture, there can be tension between the main parties who are likely to want their home country’s governing law and jurisdiction to apply in the event of any dispute. In order to reach a compromise on this, a neutral governing law and/or jurisdiction is often selected.

Deciding which law and jurisdiction should apply is a matter which requires careful consideration. It is important to get this right as it will impact on a number of factors including:

- the language of the documentation;
- the convenience of the location;
- the flexibility of the law in allowing the parties to regulate their own affairs;
- the efficiency and familiarity of the litigation process;
- the perceived independence of the judiciary;
- the ability to enforce any judgment or award that is rendered;
- the level of damages and costs which may be awarded; and
- the choice of representation that it available to the parties.

Which dispute resolution procedure?

Arbitration is a popular choice in the context of joint venture disputes and energy contracts due to the comparative ease with which arbitral awards can be enforced in foreign jurisdictions when compared with court judgments.

Many countries are signatories to the 1958 Convention on Recognition and Enforcement of Foreign Arbitral Awards (better known as the “New York Convention”) and as such, are required to recognise and enforce arbitral awards which have been made in the countries of other signatory states. There are only limited grounds on which a signatory state can refuse to recognise and enforce such an award.

Bilateral investment treaties between certain countries can also assist in ensuring that arbitral awards can be enforceable and binding in certain international investor-state disputes. In addition, countries that have signed and ratified the Energy Charter Treaty (“ECT”) are obliged to adhere to the dispute resolution procedures of the agreement. So far, the ECT has been signed or acceded to by 51 countries, although the US is a notable exception.

Arbitration also has a number of other advantages over litigation. These include:

- it can offer a neutral forum for resolving disputes,
- the opportunity to appoint an expert in the relevant field as arbitrator as opposed to relying on a judge who may be unfamiliar with the industry;
- a more flexible procedure than court litigation;
- confidentiality and privacy since arbitration hearings should be held in private – this is particularly important where the parties are continuing the joint venture - and do not wish to have their internal affairs aired in public;
- finality – in many jurisdictions an award will not be subject to an appeal on the merits and the circumstances in which a party may seek to have it set aside are fairly limited; and
- a wide variety of available remedies – an arbitrator’s powers may extend to ordering a sale of shares or terminating the joint venture itself.

There are, however, a number of reasons why a party might prefer the court process over arbitration. Courts are often in a stronger position to prevent a party from engaging in obstructive tactics. They also have the ability to join third parties to the proceedings (whereas a third party who is outside the scope of an arbitration agreement cannot be joined into arbitration proceedings unless that third party and the current parties to the arbitration proceedings consent to it). The precedent value of court judgments is also an advantage over arbitration when it comes to dealing with non-parties.

Aside from litigation and arbitration, there are also a number of other more informal means of trying to resolve disputes. These include expert determination, mediation and escalation to senior executives of each joint venture party. Expert determination is often used in contracts for the sale of a business or assets and for the apportionment of oil reserves in the North Sea, to name a couple.

However, in contrast to litigation and arbitration, which are binding, other forms of alternative dispute resolution (“ADR”) methods are by their nature voluntary. This means that in the absence of settlement, a party would still be free to commence proceedings. As such, it is always advisable for reasons of certainty to also specify a procedure to be followed if settlement is not achieved by the selected ADR method.

Which governing law?

Most developed legal systems will respect an express choice of law in a commercial contract unless it is considered to have been chosen deliberately to avoid a mandatory provision of a national law or there are other particular public policy reasons for not doing so. However, in the absence of an express choice of governing law, the issue of deciding which law to apply will fall to the court with jurisdiction over the dispute. This will generally be the court of the country with which the contract has the closest and most real connection. Of course, if the court considers that the parties have clearly intended that a particular law should apply, even though they have failed to state this expressly in the contract, the court may decide to apply that governing law instead.

The position in international arbitration is trickier as different systems of law may govern different aspects of the arbitration; Take the scenario where different systems of law may apply to the substantive dispute, the procedure to be followed, the arbitration agreement and the award. Where the parties have failed to state the governing law, this will be determined by an arbitration tribunal which will generally have a wide discretion and is likely guided by the intentions of the parties. Parties are also free to decide that disputes are to be determined in accordance with non-legal principles such as general principles of equity and good conscience, transnational law or trade law. This means that arbitration offers parties greater flexibility to tailor the dispute resolution form according to their needs.

Under most arbitration laws, an arbitration agreement is separable from the underlying contract in which it is contained. This makes it possible for the arbitration agreement to be governed by a different law to the underlying contract. In most cases the parties’ express or implied choice of law to govern the arbitration agreement will be given effect. However, in the absence of any such indication the court will need to decide which law applies and this will generally be either the law governing the underlying contract or the law of the seat of the arbitration.

Which jurisdiction?

As with governing law clauses, most legal systems will also respect an express jurisdiction clause in a contract. Yet problems do arise when parties fail to specify which courts should have jurisdiction over disputes between the parties. In the absence of an effective jurisdiction or arbitration clause, the parties will be forced to rely on the rules of private international law to determine the correct forum for their dispute.

In Europe, questions of jurisdiction are governed by the Brussels Regulation (Council Regulation 44/2001) and Lugano Convention of Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1998 (Lugano Convention) which provide some degree of certainty. Unfortunately, the same cannot be said where disputes arise elsewhere and this can often cause serious uncertainty and inconvenience.

Where parties agree that disputes should be referred to arbitration, careful consideration needs to be given to the ‘seat’ or legal place of the arbitration as this will generally carry with it the choice of the corresponding law which will govern the arbitration and the procedure to be followed.

England tends to be popular as a choice of seat because the English courts will grant a special type of injunction (known as an “anti-suit injunction”) to restrain a party from commencing court proceedings in an overseas jurisdiction where such proceedings would be in breach of an agreement to arbitrate in England. There has also been recent English case law in which the courts have shown a willingness to interpret arbitration clauses widely. Other popular seats include New York, Paris, Stockholm and Singapore.

Rules will vary from state to state but will usually include provisions entitling the local courts to intervene to support or to supervise the arbitration and rules governing interim measures. It is important to bear this in mind when choosing the seat because the approach of countries towards arbitration varies greatly. One example is a recent Ukrainian case which concerned the validity of the addenda to two contracts for the servicing of oil tankers in the Odessa Sea Port. It was decided that in spite of the existence of a valid arbitration clause in an agreement, the court had jurisdiction to hear the claim due to the fact that a third party who was not party to the arbitration agreement had also been named as a defendant in the court proceedings and was connected to the dispute. This case appears to open up the opportunity to circumvent arbitration in Ukrainian proceedings (26 January 2010- Ruling no. 12/171-54/89-39/143).

Some provisions of the law of the seat may be modified or excluded by the parties’ agreement. However, the law of the seat will usually contain some mandatory provisions which will apply regardless of any agreement to the contrary. It is also advisable to include an express choice of law to govern the arbitration proceedings where you wish to avoid the arbitration law of the place of arbitration or where the place of arbitration does not have any arbitration law.
A party contracting with a state-owned entity may find itself under pressure to agree that the seat of the arbitration should be in the country where the contract is to be performed, but it is important to consider whether this is the most appropriate choice and/or whether you would prefer the seat to be in a jurisdiction where you are more familiar with the laws which will govern the arbitration or which you know will be more supportive of the arbitration process.

If a party wishes to challenge or enforce an arbitral award, its ability to do so will also generally governed by the law of the seat of the arbitration. However, recognition and enforcement of the award will ultimately depend on the law in force at the place where enforcement is sought. In a recent case relating to the ownership of oil which was heard by the Paris Court of Appeal, it was decided that where parties to an arbitration agreement had settled the dispute between them without recourse to arbitration, it would be improper and contrary to public policy to enforce an award granted in favour of one of the parties who later decided to proceed with the arbitration (June 2009- Liquidators  of La Société Viva Chemical (Europe) NV v La Société Allied Petrochemical Trading and Distribution).

Conclusion

The importance of including a clear dispute resolution clause within a joint venture agreement cannot be understated. It is of equal importance, however, to ensure that the clause is properly drafted and thought through and that legal advice is taken, if necessary. Taking time to get this right at the outset should provide parties with a degree of clarity and certainty and will ensure that the most appropriate dispute resolution procedure is adopted in the event a dispute does indeed arise.

Johanne Westcott is an Associate in the Dispute Resolution department at Fox Williams LLP. Johanne’s practice encompasses a broad mix of general commercial litigation and high value employment litigation including breach of contract, fraud, regulatory investigations and cross-jurisdictional issues. Johanne also has international arbitration and mediation experience.

Fox Williams is an independent business law firm based in the City of London. The firm has a strong reputation for both contentious and non-contentious work in its core practice areas of corporate, partnership, employment & immigration, real estate, and commerce and technology, and has a sector focus on energy and natural resources.

For further information please contact Johanne Westcott on +44 020 7614 2665, email jwestcott@foxwilliams.com or visit www.foxwilliams.com.