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Dispute settlement in international contracts: arbitration or the court

Dispute settlement in international contracts: arbitration or the court

National borders are collapsing in the world of commercial contracts and therefore varying business cultures and legal cultures more and more meet or even collide. Companies do not limit themselves to business on their side of the border and they are expanding their operations and investments abroad. However, international contracts do entail their own challenges; legal issues not being the least of them. In order to protect your interests as much as possible, it is advisable to draft clear agreements which take into account the international character of the relationship. A common but important legal pitfall is the dispute settlement mechanism the parties agree upon.
An example: a Dutch company purchases machines from a Chinese supplier. In the purchase agreement, the parties have stipulated that the Dutch courts have exclusive jurisdiction to settle any disputes arising from or in connection with the agreement. After delivery of the machines, the Dutch buyer notices that the machines are defective. This ultimately results in a dispute between the Dutch buyer and the Chinese supplier that cannot be resolved in good faith between the parties. The Dutch buyer decides to take legal action and, in accordance with the jurisdiction clause in the contract, starts proceedings before the Dutch court. The Dutch court rules in favour of the Dutch buyer and the Dutch buyer expects it will finally be able to force the Chinese supplier to resolve the matter.
However, a great disappointment may be in store for the Dutch buyer. If the Chinese supplier does not voluntarily comply with the Dutch judgment, the Dutch buyer needs to enforce the judgment in China. And that is where the Dutch buyer will run up against difficulties.
The Netherlands have not concluded treaties or conventions with every country in the world on the subject matter of recognition and enforcement (or execution) of each other’s judicial decisions, a so-called convention relating to civil procedure. If such treaties have not been entered into with a particular country, judgments from the Dutch court are not recognised and therefore cannot be enforced in that specific country, even if the foreign counterparty appeared in court and put forward a defence. (Of course, judgments from courts in that particular country are also not recognised in the Netherlands and therefore cannot be enforced in the Netherlands either.) The Netherlands have not entered into such a convention with some important nations in international trade, like China and, as a matter of fact, even the United States (!).
An arbitration clause could provide a solution. The internationally known New York Convention (*), to which the Netherlands are party, provides for the recognition and enforcement of arbitral awards abroad. An award that is the result of arbitration can therefore be enforced outside the Netherlands (if the country where the other party has its registered office is also party to the convention of course). All important nations in international trade like China and the United States, with which the Netherlands have not concluded a convention relating to civil procedure, are parties to the New York Convention. Therefore, in such cases, the parties would be better off including arbitration as the dispute resolution mechanism in their agreement.

In view of the above, when doing business with partners from China and the United States, it is advisable to stipulate that any disputes will be resolved via arbitration. Please note that the dispute resolution mechanism is just one aspect of an (international) agreement. In any event, it would be advisable to seek deal-oriented advice and legal guidance when negotiating and drafting (international) agreements, especially when there are significant interests at stake.
Zamira Reiss

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