REDUCING THE RISK OF LAWSUITS UNDER
US - JAPAN BUSINESS CONTRACTS
by David B. Hoppe
Access International Law Group
Internet commerce has created the opportunity for more and more small and medium-size companies do to business with overseas customers, partners and suppliers. But what happens when a dispute results from one of these transactions? Is it possible to limit the risk of a lawsuit, or provide for a less-expensive way for any such disputes to be resolved? This article briefly considers how the risk of disputes may be minimized at the contract negotiation stage, and how providing for arbitration may reduce the cost of resolving disputes.
Risk of International Disputes
A company conducting business by internet with parties located in other countries may be subject to lawsuits in the courts of those other countries, even though the company has no operations abroad. Although it may be difficult for the other party to the dispute to enforce any resulting judgment, such a lawsuit may be very expensive and could affect the company’s ability to conduct business in that country in the future. As a result, it is important to make sure that any contracts with international parties are carefully drafted to minimize the risk of disputes. In addition, every international contract should include clear provisions regarding how disputes will be resolved ∁Ein most cases, particularly involving contracts to which small and medium-sized companies are party, arbitration or alternative dispute resolution may be the best approach.
Drafting/Negotiating to Limit the Risk of Disputes.
The best way to reduce the risk of expensive and time-consuming disputes arising from a contract is to make sure that the contract is clearly drafted. I recommend that a party sit down with counsel at the drafting stage and try to identify all of the possible areas of the contract under which a dispute could arise in the future. This means considering not just the terms included in the contract draft but also details of the business to be conducted between the parties. Though it may be difficult exercise at this stage, it’s a good idea to try to think of everything that could go wrong in the future with the business relationship, and then to determine whether, and how, the contract draft would address these contingencies.
Although a clearly-drafted contact cannot prevent problems from arising in the course of the business between the parties, it is much less likely that an expensive and time-consuming dispute will result. To take a simple example, a party is much less likely to proceed with a claim under the contract resulting from delay in delivery of merchandise if the contract clearly indicates the amount of compensation to be paid by the other party for each day of delay, how such amount would be paid, and whether or not such compensation would be payable even if the delay resulted from factors beyond such party’s control. In the event that a party does decide to proceed with litigation or arbitration under a term in the contract that identifies the matter under dispute and clearly specifies the consequences of the event that resulted in the dispute, it is much more likely that any such arbitration or litigation would be settled at an early stage.
In my experience, Japanese parties in particular may be inclined to leave some ambiguity in the contract, under the belief that it is better to leave the parties some flexibility in the future to deal with changing circumstances. In addition, Japanese parties may be more uncomfortable than US parties in focusing on the possible negative outcomes under the contract, and providing specifically for the consequences of such events. However, when it comes to contracting internationally, such ambiguity may be dangerous.
Effective Use of Lawyers
Most executives with experience in international business have learned to recognize the value of a close partnership with a business lawyer who understands the company’s business and objectives, and who is familiar with legal issues relating to international transactions. Small and medium-sized companies in particular, trying to manage a transaction within budget constraints, sometimes try to limit involvement of counsel at the contract negotiation and drafting stage. Waiting until the last minute to bring in the lawyer, however, can limit considerably the value that the lawyer is able to add. Once business terms have been negotiated and tradeoffs made by both parties, it may not be realistically possible to reopen discussions to address additional issues identified by the lawyer, or to prepare the contract in a way to minimize the risks to the client. In addition, parties who bring in the lawyers “to paper the deal, Ewithout fully briefing them on objectives contingencies, and requirements, are much more likely to find themselves in an expensive and time-consuming dispute later on.
Arbitration and Alternative Dispute Resolution
Arbitration is a formalized means of resolving disputes outside of court litigation. Usually arbitration procedures call for the parties to prepare pleadings, or documents setting forth their legal and factual arguments, and submit the pleadings to a neutral decision-maker, called an arbitrator. Larger international arbitrations are usually conducted before a panel of three arbitrators. Arbitration is generally binding, which means that a party’s ability to appeal an arbitration decision to a national court may be very limited.
Arbitration is generally regarded as a less expensive and faster means of resolving disputes than lawsuits in national courts, which may drag on for years and be very expensive to prosecute and defend. Most international arbitrations are completed within 18-24 months of the date of filing, though some can go longer. While court litigation may take a similar period to judgment, appeals can extend the time for resolution by many years more.
The parties have a high degree of flexibility to determine how an arbitration will be conducted ∁Efor example, the number of arbitrators and how chosen, the location of the arbitration, and the procedural rules to be used. A number of respected international organizations will administer arbitrations, and using one of these organizations may increase the credibility that a court would give to the arbitration award.
To be sure that arbitration is available to resolve disputes, a provision needs to be included in the contract. The contract term should provide that arbitration will be the sole means or resolving disputes, that the outcome of arbitration will be binding, with no right of appeal to courts, and should also specify how and where the arbitration will be conducted.
David Hoppe is an international business lawyer and the founder and principal of Access International Law Group (www.ailawgroup.com), based in San Francisco and Silicon Valley. David has several years Eexperience working in Japan and assisting Japanese clients, and travels to Japan often. David may be contacted at email@example.com.