A. What is a âdispute settlement clauseâ and why is it important?
“Where should we settle the dispute?” – this is a question that has a significant impact at every stage of dispute resolution but is often overlooked.
One way to manage the risks and costs associated with resolving disputes is formulating a dispute resolution clause. In short, a dispute resolution clause refers to the contractual provision by which the parties agree on how their dispute is to be resolved, for example through mediation, arbitration or litigation and in what jurisdiction.
As litigants, we always first look at the dispute resolution clause in a contract as the first step in formulating the game plan to resolve a dispute, as it has a huge impact on the overall strategy, the chances of success. of a claim and the execution of judgments or awards.
B. What are the key factors to consider in drafting a dispute settlement clause?
The parties are free to negotiate and agree on the terms of the dispute resolution clause to be included in their contract. Some of the key factors are highlighted: –
1. The dispute resolution clause must be valid and enforceable.
This cannot be overstated. Parties should also ensure that the dispute settlement clause is clearly worded and unambiguous in order to minimize the risk of any unnecessary arguments in the future.
For example, under Hong Kong law, an arbitration agreement must comply with the formal requirements of the Arbitration Ordinance (Cap. 609), including in writing. There should also be a clear agreement to submit the dispute to arbitration. Certain matters, such as employment matters, are not arbitrable under Hong Kong law.
Parties should also exercise caution when drafting multilevel dispute resolution clauses, which provide for dispute resolution through a series or cascade of alternative dispute resolution techniques such as negotiation, followed by a series of alternative dispute resolution techniques such as negotiation. mediation, then arbitration. Uncertainty can cause problems in the application of these dispute settlement clauses.
2. Courts, arbitration or alternative dispute resolution?
The parties may agree to submit their disputes to the courts (commonly referred to as a âjurisdiction clauseâ), to arbitration, to mediation or through a combination of several means.
Courts and arbitration are two popular choices of dispute resolution methods.
Some parties prefer arbitration to courts for the following reasons:
- General procedural flexibility
- That the parties may appoint and / or appoint the arbitrator (s) of their choice depending on the nature of the particular dispute 2
- Confidentiality in arbitration
- Mutual recognition and enforcement of arbitral awards between parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention), which includes Hong Kong1
- In the event of an arbitration headquartered in Hong Kong, the parties may apply to the mainland courts for provisional measures in order to preserve the evidence and freeze the assets on the mainland before or after the start of the arbitration (see point 4 below).
And the disadvantages?
It was often thought that arbitration would be cheaper than court proceedings because of procedural flexibility. It should be noted that arbitration can be more expensive than court proceedings. The costs of an arbitration generally include the fees and expenses of the arbitral tribunal, the administrative costs (if it is an administered arbitration) and the expenses of facilities such as translation, transcription services and reservation of the place if necessary. Under the 2018 HKIAC Administered Arbitration Rules, parties are required to make upfront payments for arbitral tribunal fees and HKIAC administration fees before arbitration can take place.
Furthermore, the flip side of procedural flexibility is the ambiguity that gives rise to arguments. For example, the rules of evidence often have to be agreed upon by the parties or at the discretion of the arbitral tribunal.
Certain procedural safeguards in court proceedings, such as the legal procedures and consequences imposed on people who make and use false statements in court proceedings, are not available in arbitration.
Arbitral tribunals may also lack the security control provided by an appeal system, since an arbitral award is usually final and not subject to appeal. On the other side of the coin, some parties may prefer the finality of arbitration, which could save time and costs in the appeal procedures generally available in legal disputes.
3. If the parties opt for legal proceedings …
The parties must decide a number of issues, including, but not limited to the following:
- Which court will be competent
- Whether the court of their choice will have exclusive or non-exclusive jurisdiction (i.e. the designated forum will not be exclusive and a party is free to bring an action in other jurisdictions) to hear the litigation
In deciding which court to choose, the parties may consider the following factors:
- Preferred judicial system
- Location of the parties’ assets (taking into account the issues related to the execution)
- Location of potential witnesses in the event of a dispute under the contract
- Applicable contract law (which has an impact on the requirement for expertise in foreign law and therefore on legal costs)
- General litigation costs in that jurisdiction
4. If the parties opt for arbitration …
The parties should include an arbitration clause in the contract, as arbitration is a consensual process and an arbitrator does not have the authority to settle a dispute unless the parties agree to arbitration.
The parties must decide a number of issues, including, but not limited to the following:
- Seat of arbitration
- Applicable law of the arbitration agreement
- Choice of the arbitration institution to administer (if it is an institutional arbitration), such as HKIAC, ICC, LCIA and CIETAC
- Choice of arbitration rules
- Number of arbitrators and any necessary qualifications required
- Language of arbitration
It should be noted that the Arrangement Concerning Mutual Assistance in Interim Court-Ordered Measures for Assistance in Arbitral Proceedings by Courts of the Mainland and the Hong Kong Special Administrative Region (the â Arrangement âentered into force on October 1, 2019, which provides a formal mechanism for courts in the PRC to grant interim measures (such as preservation orders) for the benefit of arbitrations in Hong Kong administered by certain institutions or permanent offices , including HKIAC The Arrangement encourages the parties to choose Hong Kong as the seat of arbitration in cases where the assets of a party are located in the PRC.
5. What if there are several contracts between the parties?
If a series of contracts are to be or have been performed in a single or linked transaction, parties are encouraged to include consistent dispute resolution clauses in the contracts, unless they prefer different dispute resolution clauses only. govern different aspects of their relationship.
In our experience, inconsistent dispute resolution clauses in contracts performed between the parties may give rise to satellite disputes regarding the appropriate forum for the resolution of a dispute that may be covered by such inconsistent dispute resolution clauses. .
If the parties intend for their disputes under different contracts to be resolved by different fora, this intention should be clearly reflected in the respective dispute settlement clauses.
C. Examples of dispute settlement clauses
Parties are encouraged to seek legal advice as to the form of dispute resolution clause to be incorporated into their contract to ensure that it would be valid and enforceable, as well as tailored to reflect the intention of the parties. .
Model of exclusive jurisdiction clause
The parties irrevocably agree that the courts of [Hong Kong] shall have exclusive jurisdiction to hear and settle any dispute arising out of or in connection with this Agreement or its formation, existence, validity, legality, enforceability, interpretation, termination and effects, for these purposes, each party irrevocably submits to the jurisdiction of the courts of [Hong Kong].
Model of non-exclusive jurisdiction clause
The parties irrevocably submit to the non-exclusive jurisdiction of the courts of [Hong Kong] for the purpose of hearing and settling any dispute arising out of or in connection with this Agreement or its formation, existence, validity, legality, enforceability, interpretation, termination and effects.
Model Clause for Arbitration Under the HKIAC Administrative Arbitration Rules
Any dispute, controversy, dispute or claim arising out of or related to this contract, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute concerning non-contractual obligations arising out of or relating thereto shall be referred to and ultimately resolved by arbitration administered by the Hong Kong International Arbitration Center (HKIAC) under the arbitration rules administered by HKIAC in effect when the notice of arbitration is submitted.
The law of this arbitration clause will be … (Hong Kong law).
The seat of the arbitration shall be … (Hong Kong).
The number of arbitrators is … (one or three). The arbitration proceedings will be held in … (insert language).
D. Does a dispute resolution clause survive termination?
Generally speaking, a dispute resolution clause survives the termination of the contract which contains it.
Dispute settlement clauses could have far-reaching implications when a dispute arises.
Parties are encouraged to consult at an early stage with lawyers specializing in commercial litigation and dispute resolution regarding the implication of the particular dispute resolution clause (or lack thereof) in their contract at the time. origin of the dispute, which is central to the design of the overall strategy for a rapid and efficient dispute resolution process.
Frequently Asked Questions (FAQ)
Q1: What is a dispute resolution clause?
A1: A dispute resolution clause is a contractual provision by which the parties agree on how their dispute is to be resolved.
Q2: Why are dispute settlement clauses important?
A2: Dispute settlement clauses are important for certainty and they have a huge impact on overall strategy, the prospects of a successful claim and the enforcement of favorable judgments or awards.
Q3: Who chooses the dispute resolution clause?
A3: The dispute settlement clause is subject to the parties’ agreement.
Q4: Do dispute resolution clauses survive termination?
A4: Dispute resolution clauses generally survive termination.