Jurisdictional Clauses in Complex International Transactions
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Sayenko Kharenko enjoys a global reputation as the leading Ukrainian transactional and dispute resolution law firm. The firm regularly handles the largest and the most innovative projects involving Ukrainian assets or counterparties in agricultural, finance, pharmaceutical, energy, communications, media, retail, steel and other industries.
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Many international transactions today involve several related contracts entered into by parties from different jurisdictions. Depending on the complexity and nature of the respective transaction, the involved contracts could be interrelated in different ways. When negotiating such complex transactions, the parties usually pay due attention to the obligations and legal guarantees of their performance, but quite often they do not so think seriously about the resolution of their potential disputes. Sometimes it happens that the contracts or agreements involved in such a complex transaction may be drafted by different teams of lawyers from different jurisdictions that exclude the possibility to anticipate all potential disputes and related procedural risks by them. As a routine, in such situations the lawyers can incorporate a model dispute resolution clause in a contract they draft, being guided by different factors: from the client’s preferences of a particular jurisdiction or forum to their previous experience in similar transactions, already successfully closed. Normally, such drafters do not know what happens afterwards in the event of a dispute arising.
As a result of the above drafting, clients may face a situation when separate agreements involved in their transactions contain different dispute resolution clauses, not allowing, e.g. to consider a dispute connected with several or even all such agreements before one single forum, or to bring an action against several respondents or to join all the “necessary” parties to the proceedings, or to consolidate several proceedings if initiated at a different time, etc. As a result, the dispute resolution could be fragmented between several forums, which may entail, among other things, additional commercial risks, evidentiary problems, increased costs, and enforcement risks related to the decisions inconsistency. Certainly such fragmentation could not be avoided in view of specific reasoning to refer the dispute to different state courts or to a particular court rather than to arbitration, e.g. if it is connected with availability of interim measures or matter of arbitrability of disputes under separate contracts. But in any case the fragmentation must be understandable and reasonable in order to ensure the possibility to structure procedural strategy in the event of any dispute.
It is established practice, for example, for project finance or franchising transactions to involve suretyship, mortgage, pledge or other types of agreements aiming to ensure fulfillment of financial obligations by one of the parties (debtor). As a rule, a debtor does not have enough assets and in case of its default the creditor needs to initiate proceedings under the above agreements to recover the debt. Needless to say, that the claim against sureties or guarantors could be quite a problematic exercise, even from the point of proving the debt under the principal contract. The ideal solution would be a single proceeding under all related agreements, or at least under the group of interrelated similar agreements (e.g. suretyship agreements). But, in practice, such sureties or guarantors are different physical and legal persons located in different jurisdictions. If so, it could be rather difficult to “join” them in the same proceedings, be it litigation or arbitration, without proper dispute resolution clause(s) meeting special requirements of applicable rules and/or law. Even completely identical, but standard, disputes resolution clauses contained in such agreements would not guarantee the required effect. Needless to say, that time and costs of such proceedings are also highly important factors.
In recent cases handled by the authors there were four suretyship agreements both with physical and legal persons. Two suretyship agreements contained identical standard arbitration clauses in favor of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. But the Arbitration Rules of the latter do not allow accepting a statement of claim based on two or more different contracts without an arbitration agreement expressly providing for such possibility. Thus, the only available solution was to initiate two separate arbitral proceedings before that arbitral institution. But if we add, that two other suretyship agreements in the same transaction contained arbitration clauses in favor of another arbitral institution, whereas the main contract contained choice of court agreement, the situation looks significantly worse for the creditor and definitely burdensome from the point of costs and time.
When a transaction involves a particular group of companies on one side, quite often the negotiations are conducted with the principal representative of the group, but finally the contracts are concluded by different entities of that group (affiliates). Such a situation may entail several problems for the other party, both commercial and legal. First, the affiliate may have no assets and the creditor, even the respective proceedings are won, would not be able to get its money. Second, such affiliate may have rather limited involvement in the actual performance of the contract and that fact could pose additional problems in evidentiary procedure. For instance, quite often all the correspondence and communications related to the contractual performance are conducted with the staff of another affiliate of the same group and depending on the applicable law and the forum chosen it is not always possible to rely on such correspondence as evidence in the proceedings to prove e.g. the breach of the contract by its actual signatory or any modifications of a contract agreed subsequently. Third, if several affiliates are involved in different interrelated contracts of the same transaction, proceedings against only one of them may have no commercial sense. From the legal point of view, it could be difficult if not totally impossible to win a dispute against one affiliate without joining another affiliate to the same proceedings. But such joinder could be a problem, especially if respective contracts contain different or non-compatible dispute resolution clauses. The foreign legal doctrines allowing the extension of respective dispute resolution clauses (first of all arbitration clauses) to a non-signatory(ies), such as group of companies, alter ego, piercing the corporate veil doctrines, etc., are not always applicable.
The list of complex transactions is rather long and includes inter alia mergers & acquisitions, joint ventures, international franchising, infrastructure projects, constructions and other complex transactions involving multiple related agreements. Even international sale of goods could be relevant in this regard in case of string contracts or series of separate contracts between the same parties, or execution of delivery contracts under the framework contract, etc.
Drafting dispute resolution clauses and tailoring them to match complex transactions is no easy task. Even for similar projects there is no standard solution, as many factors should be assessed on a case by case basis.
In practice, the most workable option is to have a special dispute resolution protocol for all/certain disputes arising out of or in connection with respective transaction. International arbitration is usually the best dispute resolution mechanism for such complex disputes. If the parties chose arbitration but for some reasons could not agree on a common protocol, they may find a lot of useful advice in the IBA Guidelines for Drafting International Arbitration Clauses (IBA Arbitration Clause Guidelines), 2010, aiming to inform parties both of the choices available and the pitfalls to avoid. Particularly, the latter provides the following guidelines for multiparty and multi-contract arbitration clauses.
Multiparty Guideline 1: The clause should address the consequences of the multiplicity of parties for the appointment of the arbitral tribunal.
Multiparty Guideline 2: The clause should address the procedural complexities (intervention, joinder) arising from the multiplicity of parties.
Multi-Contract Guideline 1: The arbitration clauses in the related contracts should be compatible.
Multi-Contract Guideline 2: The parties should consider whether to provide for consolidation of arbitral proceedings commenced under related contracts.
Following the structure of the IBA Arbitration Clause Guidelines each of the above cited guidelines is supplemented with explanatory comments and working draft of a specific arbitration clause meeting particular requirements.
However, in such complex issues even the IBA Arbitration Clause Guidelines stress that “specialized advice should generally be sought to draft such clauses”.