Incoterms_® and Commercial Contracts

6.1 Preparing an international dispute resolution strategy

6.1.1 Why dispute resolution is vital

All business disputes are troublesome, but international disputes can be particularly costly:

1. A firm may be forced to retain foreign counsel.
2. Company executives may be compelled to travel to distant and even hostile venues.
3. Voluminous documentation may need to be translated.
4. Gathering of evidence abroad can be expensive and difficult.
5. It is harder to predict the outcome of proceedings under unfamiliar laws or procedures.
6. Given the complexity of international commercial law, it can be difficult to determine who is fault and to what extent.
7. Even if a firm is successful in litigation or arbitration, it can be difficult and time– consuming to enforce the money award.
8. International business partners represent a significant investment - the loss of a foreign counterparty or partner due to hostile litigation can be devastating in a particular market and take years to overcome.

For all these reasons, firms should devote time and attention to preparing for international negotiations so as to foresee and eliminate the most likely sources of dispute.

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6.1.2 Discuss dispute resolution during contract negotiation and drafting

Parties should carefully verify that their international contracting partners are trustworthy and solvent. The contract should be sufficiently precise so that difficulties of complying with the contractual provisions are unlikely, but also sufficiently flexible so that foreseeable contingencies fall within the scope of the agreement. Adaptation and price-escalation clauses can be helpful ways of building flexibility into a long-term contract. If the parties desire an ongoing commercial relationship, they may wish to specify in their contract that disagreements be initially addressed by re-negotiation, mediation or conciliation or other forms of dispute-resolution mechanisms as an alternative to court or arbitral proceedings. A well-drafted contract will also contain a clear and precise clause specifying the dispute-resolution technique agreed upon by the parties.

International arbitration is the most common way of solving international business disputes. Arbitration is considered to be more neutral, faster, cheaper, less adversarial and more confidential than state court litigation.

6.2 After a dispute arises

If the parties have failed to provide for a specific dispute–resolution mechanism in their contract, they may try to come to an agreement after a dispute has arisen. This, however, becomes more difficult when the parties have adopted hostile, defensive postures. Reaching an agreement on elements such as the place of arbitration, the applicable law to the merits of the case and the selection of an arbitral institution may be impossible. It often happens that a party conscious of its own responsibility or liability will adopt all sorts of dilatory tactics with a view to delaying justice.

6.2.1 Working it out - contractual foresight and adaptation clauses

Adaptation clauses are useful in contracts expected to last for a period of years or which are expected to begin a continuing business partnership. These have already been discussed above as regards the contract of sale. Force majeure and excusable delay clauses are what might be termed automatic adaptation clauses, in that certain future events automatically trigger a suspension of a number of contract responsibilities, provided these events do not totally frustrate the contractual transaction. Wars and natural catastrophes are usually considered by the parties to the contract and case law as force majeure circumstances that excuse non-performance by one or all of the parties. The ICC Model Force Majeure Clause is discussed in detail in Chapter 4.

Price provisions are often linked to an escalation clause in the case of long-term contracts. A given price may remain in effect, say, for six months, and thereafter be pegged to a publicly available inflation index. A buyer may also be given a “best price” or “most favoured” clause, according to which the buyer is assured that it will never pay a higher price than any other customer. The validity of such clauses must, however, be carefully studied in respect of competition law and financial regulations.

Adaptation clauses often relate to products the manufacturing, delivery or sale of which is contemplated by the contract. Product specifications may be subject to updating of catalogues or verifiable changes in market conditions. Variation and substitution clauses may allow a party to deliver goods that are functionally as good as the contract goods, but which may differ slightly in composition. Delivery provisions may be made flexible by allowing for excusable delays or time extensions, particularly in the event of unexpected occurrences.

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Specific clauses are often drafted to excuse non-performance or to limit liability resulting from non-compliance with the contractual provisions as a result of significant changes in the factual or legal framework, such as drastic changes in government policy, legislation or tax rules.

6.2.2 Talking it over - waiver, re-negotiation, assistance of an expert

a. Waiver

A common response to minor contractual breaches is to excuse them. It is quite common for minor breaches to be forgiven, as for example with respect to lateness in delivery, delivery of a different quantity of products or with failure to reach minimum sales targets in agency and distributorship contracts. From a legal point of view, such forgiveness may amount to a “waiver” or abandonment of the aggrieved party’s right to object.

One way of preserving one’s rights and avoiding an unwitting waiver is to insert a clause in the contract specifying that all contractual modifications must be in writing, or that any waiver would have to be expressly accepted in writing by the party for the benefit of which the unperformed obligation was stipulated. Another option, in the event that a party may wish to tolerate a particular breach on a single occasion, but not as a general rule, is to object in writing to each breach.

b. Re-negotiation

The parties can always mutually agree to modify an existing contract. In some cases, they expressly include a clause that gives an option or binds executives of the two parties to meet for formal re-negotiation in the event of a disagreement. Under such a clause, depending on the binding nature or not of the obligation to re-negotiate, the parties may commit themselves to a concerted effort to avoid more acrimonious forms of dispute resolution, such as litigation.

c. Seeking the assistance of an expert

An independent expert in the relevant field can often assist parties in resolving their controversies. The opinion of an expert is a much less formal and aggressive procedure than court proceedings or even arbitration. For example, an expert could be requested to give an opinion on questions of a legal, financial or technical nature. The typical fields of activity in which experts are often called upon include:

• technical assessment of machinery or processes;
• testing the quality of a product or construction artifact;
• investigating the performance or conformity of industrial plants;
• investigating the causes of failures of a deal;
• investigating the causes and consequences of delays; and
• assessing the value of a company’s shares.

The role of an expert in advising on such matters could include:

• during the construction of a plant, advice on the conformity of materials or services with contractual specifications that may later be used as a “record of the factual situation”, or could later form the basis of recommendations; and
• assisting lawyers in the preparation of a legal submission.

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The purpose of the expert’s findings, decisions or recommendations varies according to the parties requesting them. Alone, they will usually not form the basis of a binding, enforceable decision. However, such findings, decisions or recommendations, made close to the time of the disputed events - and whether embodied in a report or not - can be highly persuasive for judges or arbitral tribunals.

Parties who need the services of an internationally recognized expert in a given field may request the ICC International Centre for Expertise (the “Centre”) to furnish the name of such an expert in the particular field concerned. The Centre, established in 1976, operates under the ICC Rules for Expertise (available at www.iccexpertise.org). The Centre deals with technical, financial, legal, or other questions calling for specialized knowledge. The parties may refer to the Centre’s Rules for Expertise in their contracts or at a later date.

Any party or arbitral tribunal may request the Centre to propose the name of an expert. The requesting party or the arbitral tribunal will not be obliged to call on this expert’s services. A party could require an expert’s opinion in various situations either inside or outside a dispute. For example, outside a dispute a party may seek advice on technical matters before entering into a contract. An arbitral tribunal, in resolving a dispute, may seek an expert opinion on a technical matter or a specific point of law.

6.3 International litigation

6.3.1 Litigation

Dispute resolution via recourse to public courts or tribunals is generally the slowest, most costly and most confrontational of the various dispute resolution options. Experienced traders and their counsel often try to avoid the possibility of court actions by negotiating for the inclusion of ADR or arbitration clauses in their contracts.

Considering the limitations of litigation, it may seem surprising that some traders and lawyers resort to litigation as the principal means of resolving commercial disputes, even minor ones. Some companies and some countries appear to be more litigious than others. This may be partially due to training or lack of it (i.e., an ignorance of procedures like international commercial arbitration, ADR and the benefits of adaptation and re-negotiation clauses).

However, the benefits of litigation as main dispute-resolution method can have strong advantages for a party in an especially strong negotiating position - such a party will impose recourse to its own local courts. Practical or economic considerations and the threat of costly court procedures may intimidate the weaker party from pursing a legal claim.

International litigation is generally considered to be vexingly slow, complicated, unfriendly and expensive. It is technically difficult and often requires specialized professional counsel. In addition, there exists a risk of court bias when the court decision has to be enforced in the country of the party having the same nationality as the state court before which enforcement is sought.

Litigation is final after appeals are exhausted and enforceable in the country in which it takes place. However, in an international context, arbitration is often more effective than litigation in terms of enforcement, because arbitral awards are supported by the widely ratified 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and other regional conventions for the recognition and enforcement of arbitral awards.

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In some cases, the reputed slowness of litigation can be beneficial to one of the parties. A party which is in the wrong and expects to ultimately lose a case may prefer to stall the case in a national court system and delay judgement as long as possible.

6.3.2 Where to bring suit: jurisdiction and choice of forum

Lawsuits must be brought in the proper courts or arbitral tribunal, i.e, a court or tribunal competent to hear a case. The first thing an aggrieved party must do in an international dispute is choose a court or tribunal (a “forum”) that has jurisdiction over the case.

Under the Roman law principle, actor forum rei sequitur¹, the plaintiff was required to bring suit in the defendant’s local courts. As modern international trade developed, aggrieved traders wished to assert jurisdiction over a foreign defendant in any jurisdiction where that defendant had assets. As international centres of commerce grew in the 19th and early 20th centuries, their courts developed legal theories for exercising jurisdiction over foreign defendants.

Today, most courts asked to hear a case arising out of an international business dispute will look first to the contract to see if it contains a choice of forum clause (see below), and will then determine in light of the circumstances and national law whether to assert jurisdiction.

If a contract is silent on the country of the proper court, the parties involved in a dispute may want to invoke the jurisdiction of the national courts in which they think they have the highest likelihood of success, or the courts which are most convenient for them. This practice, known as “forum-shopping”, can create problems. A party might try to bring suit in a country only tangentially related to the contract or, after a lawsuit has commenced in one country, bring a counter-suit in yet another country.

In order to avoid these uncertainties, parties to an international contract will frequently include a forum selection or choice of forum clause. Commonly, the party with the stronger negotiating position will propose this clause stipulating that lawsuits must be brought in the stronger party’s domestic courts or before the courts where its thinks it has the greater chance of success.

Choice of forum clauses may be subject to a test of reasonableness: the chosen forum should bear some logical relation to the subject of the contract. Thus, in a lawsuit arising under a distribution contract between a large German manufacturer and a small Puerto Rican distributor, it was held that a choice of forum clause specifying Mexico as the appropriate forum was not reasonable. The court held that the tacit effect of such a provision was to render it difficult for the Puerto Rican distributor to undertake any legal action. However, even where the choice is reasonable, choice of forum clauses may not be respected in all countries or in all situations. For example, the Brazilian courts have been notably willing to ignore forum selection clauses which impose foreign litigation on a Brazilian counterparty.

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6.3.3 Choice of law and applicable law

The parties may choose the law which they wish to govern their contract so long as it is not contrary to the public policy of the place where suit is brought.

If the contract does not specify the applicable law, or if the choice of law is unreasonable or contrary to public policy, then the court that hears the case may have to choose the applicable law. In doing so, courts refer to a body of legal theory known as “conflict of laws”, which can involve complex analysis beyond the scope of this book. However, the basic elements of conflict of laws analysis are grounded in common sense - the court will primarily look to the place where the contract was negotiated and/or signed, the place where it is to be performed and/or the domiciles of the parties involved.

Some countries leave great latitude to the courts to decide the most appropriate law (commonly, the law which bears “the most significant relationship” to the contract). Various international treaties provide a certain measure of harmonization of conflict of laws principles. Amongst the most important is the EC Convention on the Law Applicable to Contractual Obligations (Rome 1980), which applies in most European Union courts.

6.3.4 Enforcement of judgements

Winning a lawsuit is not enough. The legal judgement must then be enforced. If the complaining party obtains a judgement directing the other party to pay money damages, the prevailing party must also apply for a court order compelling the loser to pay over the funds. The likelihood of ultimately being able to enforce a judgement is something that must be thoroughly considered before the lawsuit begins. It may be useless to receive a money judgement against a party who is likely to declare bankruptcy or disappear. Thus, a party wishing to begin a lawsuit should assure itself that the other party has sufficient assets to satisfy a money judgement. It may be necessary to apply for an injunction - a court order - freezing those assets until the case is decided.

Difficulties often arise when a judgement is obtained over a foreign party who has no assets in the jurisdiction where the judgement is rendered. In this case, the successful party will look for countries in which the loser has assets to satisfy the judgement. Such assets can often be found in the jurisdiction where the losing party is domiciled. A court procedure commonly known as an exequatur or “execution of judgement” must then be held in that country. An exequatur involves a hearing by a court that is being asked to recognize a foreign court’s judgement.

Will the exequatur result in enforcement of the foreign judgement? The situation varies widely from country to country. In the European Union, the Brussels and Lugano Conventions and European regulations have made enforcement of foreign judgements from other European Union countries a fairly routine matter. In other countries, the courts will often ask whether there is a relationship of reciprocity between the courts of the two countries. In essence, this means, “we will enforce your judgements if we find you have enforced ours”.

6.4 International commercial arbitration

6.4.1 Benefits of international commercial arbitration

International commercial arbitration is often the most appropriate dispute resolution mechanism for international transactions where a binding decision is required.

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The advantages of arbitration are numerous:

The choice of arbitration allows the parties to deal with the otherwise troublesome negotiating point of deciding where a lawsuit should be brought in the event of a dispute. Many traders may hesitate to take the risk that they would have to sue in a foreign court, where they may not only be unfamiliar with language, procedure, law and customs, but where they may even have doubts about the neutrality of the judges or judicial system. With arbitration, the parties may agree that the case will be heard in a neutral country (although arbitration can take place anywhere, including the country of one of the contract parties).

Arbitration is private, usually considered to be confidential and does not generate publicly available records of decisions. Companies may not wish to take the risk that unfounded charges against them gain publicity by being debated in open court.

Arbitration is generally faster and cheaper than litigation. Experienced lawyers can sometimes take advantage of complicated court procedures to stall and delay the resolution of a case, while arbitral procedures are less amenable to dilatory tactics. In many countries, the courts are so backlogged that even getting to the initial phases of hearing a case can take years. Moreover, arbitral awards are normally final, whereas court judgements can usually be appealed to higher courts. Finality in arbitration means that the dispute-resolution process is less disruptive to business and usually cheaper, because the dispute will usually be resolved after only one set of proceedings.

International arbitration proceedings can be held in any language. As well as providing added convenience, this may reduce costs related to translations.

The parties in a dispute may be able to designate an arbitrator who is an expert in the relevant technical field, or who at least has experience in the relevant business sector. Experienced trial attorneys often complain that judges, on the other hand, do not really understand the technical issues upon which they are called to rule. The expertise of the arbitrator may also contribute to obtaining a more rapid final decision, because the arbitrator will not have to receive as much “education” as a judge.

Enforcing international arbitral awards may be simpler than enforcing judgements from foreign courts due to the existence of international conventions, in particular the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the 1958 New York Convention”².

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6.4.2 Potential disadvantages

Despite the foregoing, certain reservations are also sometimes voiced about arbitration.

Although it is said that arbitration is relatively cheaper and faster than litigation, there are many examples of arbitral proceedings that were very expensive or dragged on for many years (which is not to say that those cases, had they been litigated, would not have been even more expensive and time-consuming). With litigation, by comparison, there is no need to pay the judges’ salaries nor the rental of the courtroom.

Nonetheless, arbitration is widely believed to be less expensive than litigation overall, because the procedure is swifter and not open to appeal. Moreover, arbitration permits greater flexibility and party control over the procedures. In a sense, with arbitration you get what you pay for. However, parties are well advised to understand that the assertion that arbitration is cheaper and faster does not necessarily mean that it is always cheap or fast.

The many procedural devices allowed in litigation, while often having the effect of slowing the progress of a case, are not without potential benefits for both sides. Some lawyers experienced in civil litigation have found themselves frustrated by what they perceived to be the relative informality of arbitration, which in their eyes constituted a lack of “rigour” or “order”. However, the inherent flexibility of arbitration means that whenever the parties agree that it is in their interests, proceedings can be pre–structured so as to have effective procedural safeguards. For example, complex arbitration proceedings can be conducted with transcripts or written records.

In litigation, losing parties may appeal to a higher court to have the matter reconsidered. However, in arbitration, the enforcement of an arbitral award may be challenged only to a limited extent in the appropriate court. In general, recourse against an arbitral award is much more limited than against an initial court judgement.

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