Japan dispute avoidance newsletter

number 62 October 2007

To ensure that you continue to receive this newsletter, please let us know if you change your contact details (email new details to peter.godwin@herbertsmith.com) Should you wish to discuss any of the issues outlined in this newsletter, or any other legal issues that may be relevant to your business, please do not hesitate to contact Peter, Dominic or David.

Multi-Tiered Dispute Resolution Clauses

In a recent PwC survey leading in-house counsel from around the world were asked about their attitudes to dispute resolution. 73% of the respondents indicated that they preferred to use arbitration as means of dispute resolution. Of these, about two thirds preferred to use it in combination with another ADR process in a multi-tiered dispute resolution procedure.1 In the March 2003 issue of the Herbert Smith ADR Newsletter we looked at the drafting of multi-tiered dispute resolution clauses. These clauses provide for distinct stages involving separate procedures for dealing with and resolving disputes. For example, the clause may say that the parties must make reasonable endeavours to resolve the dispute amicably, then provide for mediation, and only if that fails refer the matter to arbitration. As noted in our earlier newsletter, perhaps the greatest concern in relation to these clauses is enforceability. This edition of the newsletter considers recent case law on this topic and comments on the practical issues surrounding the use of such clauses. When will a clause be binding analysis of a recent decision of the Swiss courts In June this year, the Supreme Court in Switzerland considered a challenge to an arbitral award on the basis that the multi-tiered dispute resolution clause had not been fully complied with. The relevant clause stated that: "Any controversy or dispute relating to the present contract and which cannot be resolved amicably (including by conciliation under the World Intellectual Property Organization rules) shall be submitted to an arbitral tribunal which alone shall have jurisdiction to decide finally, to the exclusion of the ordinary courts. Moreover, the arbitral tribunal alone shall have jurisdiction to decide on any dispute concerning the applicability of this arbitration clause. Negotiations already underway shall in no way constitute a hindrance to the initiation of arbitration proceedings." In this case, the court held that the reference to pre-arbitration conciliation was not a precondition to arbitration. However, in respect of this clause, there were several factors which supported this conclusion. Firstly, there was no time limit for conciliation. As noted in our previous newsletter, in order to make a multi-tiered clause enforceable it is important to unambiguously set out the nature of the procedure for each tier, including timeframe. Secondly, the final sentence of the clause stated that arbitration may be commenced while negotiations are underway. This indicated that the intention of the parties was not to make conciliation proceedings mandatory.

Contacts

Peter Godwin Partner Registered Foreign Lawyer Tel: +81 3 5412 5412 E: peter.godwin@herbertsmith.com

Dominic Roughton Partner Registered Foreign Lawyer Tel: +81 3 5412 5412 E: dominic.roughton@herbertsmith.com

Thirdly, the party who had brought the challenge to the award had not tried to pursue negotiations at the time of the dispute or during arbitration. Rather, they had simply gone along with the arbitration and then tried to challenge it on the basis that the multi-tiered clause had not been properly complied with. These three factors are particular to this case, and it is unclear what decision the court would have made in the absence of them. Consequently, the decision leaves open the question of whether non-compliance with a multi-tiered clause affects the arbitral tribunals' jurisdiction or results in liability. In addition, courts in different jurisdictions may take difference approaches. As a result, there is a risk that that such clauses will be detrimental to the ultimate dispute resolution process chosen by the parties. To avoid this, the clause needs to be very clear about what is required at each tier.
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David Gilmore Senior Solicitor Registered Foreign Lawyer Tel: +81 3 5412 5412 E: david.gilmore@herbertsmith.com

PricewaterhouseCoopers, SIA School of International Arbitration & Queen Mary, University of London, International Arbitration: Corporate Attitudes and Practice (2006), available at http:// www.pwc.com/extweb/pwcpublications.nsf/docid/B6C01BC8008DD57680257171003177F0/ $file/pwc_IA_Study.pdf.

The need for clear drafting and cost of ambiguity It is essential that any dispute resolution clause is clear and unambiguous. At the time of drafting a contract, such a clause may not be at the forefront of the parties' minds, as the hope will be that it will never be necessary to resort to it. However, if a clause (whether simple or multi-tiered) is not properly drafted it can be hugely expensive and time consuming. A recent New Zealand case2 is a clear reminder of this the parties' dispute over what method should be used to resolve their substantive disagreement was appealed all the way to the NZ Court of Appeal, an ironic result given that the one clear purpose of the clause was to keep any disputes out of the court system! Practical advice In a relatively simple contract, a single level dispute resolution clause is normally the best solution. This is because the less complex the ADR clause, the less scope there is to dispute its meaning. This means that if a dispute arises the parties can get on with resolving it rather than debating the procedure that should be used to do so. However, even in a simple clause it is essential to include the appropriate procedural details and legal advice should be taken on this. If the contract is complex enough to warrant it, then a well drafted multi-tiered dispute resolution clause can take the parties through a structured process and help resolve the dispute in an appropriate, cost effective and efficient manner. However, the requirements of each tier should be clear, precise and sufficiently detailed in respect of timetable and procedure in order to avoid problems with enforceability. Should you wish to discuss any of the issues outlined in this newsletter, or any other issues which may be relevant to your business, please do not hesitate to contact us.

Index of previous 12 newsletters October 2006 Legal Strategies for Coping with an Avian Flu Epidemic November 2006 Drafting an Effective Arbitration Clause December 2006 Exclusion Clauses and the Concept of 'Gross Negligence' January 2007 CIETAC Arbitrations in Practice Part II February 2007 Arbitration Clauses and their Scope March 2007 Terminating Contracts for Breach: Risks and Rewards April 2007 English Company Law: Claims against Directors May 2007 New Rules on Enforcement of Judgments in China - Part 1 June 2007 New Rules on Enforcement of Judgments in China - Part 2 July 2007 HKIAC and SIAC: The Differences August 2007 Enforcement of Arbitration Awards Under the New York Convention September 2007 Expert Determination Material

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances. Herbert Smith, Gleiss Lutz and Stibbe are three independent firms that have a formal alliance.
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Port & Ors v Gullivers Travel Group Ltd [2007] NZCA 345

Herbert Smith 2007