Introduction to Business Law and Ethics

Dispute Resolution Clauses

Dr. Ahmet Cemil YILDIRIM, LL.B., LL.M., Ph.D.

Outline
1. No written agreement on dispute resolution
2. Dispute resolution clauses providing for litigation
a. If the courts in the plaintiff’s country are competent
b. If the courts in the defendant’s country are competent
c. If a neutral country’s courts are competent
4. Dispute resolution clauses providing for arbitration
5. Escalation clauses
6. Pathological arbitration clauses

No written agreement on dispute resolution

 It is a very common situation that the parties to an international
commercial agreement do not make a written agreement. This is true
especially for contracts providing for a one-time performance, such as
one-time sales.
 This is not the worst situation; because the parties may have recourse to
courts for resolution of their disputes.
 However this is absolutely not the best situation either: The parties do
not have any agreement on
 which legal system and
 which court has jurisdiction to hear their case,
 which law will apply to the merits.

 Plaintiffs may manipulate the conflict of laws rules for the purposes of
forum shopping and they may tend to have recourse to the court which
serves to their purposes the best.
 Likewise, defendants may raise jurisdictional objections more easily since
there is not an agreement on jurisdiction.

2. Dispute resolution clauses providing for litigation

 If the parties provided the resolution of their disputes by means of
litigation, there are three possibilities:
a. The parties may have chosen the courts in the plaintiff’s country
b. The parties may have chosen the courts in the defendant’s country
c. The parties may have chosen the courts of a neutral country

a. If the courts in the plaintiff’s country are competent

 For the plaintiff, it will be easier and more cost-efficient to bring action
and follow the procedures. For the defendant, following the procedures

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 will be more burdensome. Moreover, there is the risk that the courts in
the plaintiff’s country will not be impartial to the defendant’s case.
 If the defendant has assets in the plaintiff’s country, it will be easier for
the plaintiff to enforce a court judgment in its favor.
 However, if the plaintiff will have to enforce the judgment in another
country, it will first have to have the judgment recognized in that country.

 For recognition of foreign court judgments,

 there should be a judicial cooperation agreement between the country
where the judgment is made and the country where the enforcement is
sought.
 There may be other requirements for recognition of foreign judgments as
well, such as reciprocity in recognition.
 The result in the proceedings for recognition is not guaranteed. If, for
instance, the successful plaintiff losses the action for recognition in the
defendant’s country, all its efforts will go to waste.

b. If the courts in the defendant’s country are competent

 Following the court proceedings will become more burdensome for the
plaintiff; albeit easier for the defendant.
 On the side of the plaintiff, there is always the risk that the courts of a
foreign country will not be impartial and tend to protect its nationals.
 If the plaintiff gets a judgment in its favor, its enforcement will be easier.

c. If a neutral country’s courts are competent

 Following the court procedures will be expensive and burdensome for
both parties. While deciding to the courts of a neutral country, the parties
should allocate the burdens in an equitable manner.
 The risk of partiality of the court will be lower.
 The difficulties and risks regarding the recognition and enforcement
process in a foreign country are still valid.

 Choosing litigation for resolution of international commercial disputes

may not always be a good idea. Because,
1. If the country of the court proceedings and the country of enforcement
are different, enforcement would depend on successful recognition of the
court judgement. Recognition means more costs and more risks.
2. It is not possible to choose the judge. If the subject matter of the dispute
requires some expertise, parties should choose arbitration, where they
can choose arbitrators according to their expertise.
3. If the subject matter of the dispute requires confidentiality, parties should
prefer arbitration, where the proceedings are confidential.

3. Dispute resolution clauses providing for arbitration

 What are the reasons for choosing arbitration?
1. Arbitration is a dispute resolution system independent of the parties’
nationalities.
2. It is possible to choose arbitrators according to their expertise.
3. Arbitration proceedings are confidential.

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 4. Recognition and enforcement of arbitral awards are relatively easier and
cost-efficient with respect to the enforcement of foreign court judgments.
Because,
 Recognition and enforcement of arbitral awards are usually made
according to the 1958 New York Convention, to which 168 countries are
signatory as of September 2021.
(https://uncitral.un.org/en/texts/arbitration/conventions/foreign_arbitral_awards/status2 )
 There is no need for judicial cooperation agreements or fulfillment of
other requirements.
 While recognizing arbitral awards, courts do not review the merits of the
case, but limits to a few procedural issues.

Therefore, recognition of arbitral awards is easier, faster, and less risky.

4. Escalation clauses

 In escalation clauses, parties engage in a series of steps, usually in the

form of one or more alternative dispute resolution procedures – such as
structured negotiations, mediation, adjudication, neutral or expert
determination – before resorting to the ‘final’ dispute resolution
mechanisms of litigation or arbitration. Each subsequent step in the
process is engaged if the parties cannot resolve the dispute during the
previous step.
 Escalation clauses are usually preferred in long term contracts where
there is a commercial advantage to attempt first to resolve the disputes by
cheaper and more efficient, albeit non-binding means.
 Escalation clauses should be drafted very carefully so that all the steps are
clearly distinguished from each other.

5. Pathological arbitration clauses

 Pathological clauses are arbitration agreements whose unclear or

inconsistent wording runs counter to the setting in motion of a
proceeding that will lead to an enforceable award.
 Professional parties usually use standard terms or model clauses
while drafting arbitration clauses.
 Arbitration clauses create exclusive jurisdiction. If the parties have an
arbitration clause in their agreement, they cannot have recourse to courts.
For this reason, the parties’ intent to arbitrate should appear clearly from
their clauses.
 Pathological arbitration clauses bring many important risks in terms of
resolution of potential disputes. The parties may not have recourse to the
institution that they intended to choose. PARTIES MAY EVEN HAVE NOT
RECOURSE TO ARBITRATION AT ALL.