Businesses tell us that the last thing they want is to end up in a dispute over the terms of their contracts. The appetite to be involved in a time-consuming and costly argument is understandably low. For that reason, time and care is often focussed on the drafting of what are seen as the main terms of the contract. Inevitably, however, disputes arise.
It will only compound the situation to find that you are arguing about the way in which any dispute should be resolved before being able to think about how to resolve the dispute itself. Often the pace of negotiations or inclination to see a dispute resolution clause as ‘boilerplate’ drafting can mean that the clause is not properly thought through or overlooked altogether. Time and effort should be spent ensuring that dispute resolution clauses are clear and workable – careful and precise drafting in dispute resolution clauses at the time can prove to be an invaluable use of resources at a later stage.
Otherwise, parties can be caught up in a long cycle of litigation before any steps have even been taken towards resolving the merits of the dispute itself. The cross-border nature of many large-scale contracts can mean that it can take months, or even years, to resolve how a dispute should be dealt with.
This situation can often arise in the context of the determination of the provisions of an arbitration clause. Parties frequently choose arbitration as an alternative to litigation, particularly given that it provides a confidential forum in which to determine the claim. The governing rules of the arbitration, the seat of the arbitration, the number of arbitrators, and the language of the arbitration can all be chosen by the parties. Where difficulties can arise, however, is if the arbitration clause is unclear or its provisions conflict.
A cautionary tale of what can go wrong can be found in the case of Enercon GmbH and another v Enercon (India) Ltd. Enercon and EIL were involved in a joint venture wind energy project in India. A dispute arose in relation to royalties that Enercon claimed it was entitled to be paid in terms of an intellectual property license agreement.
The agreement contained an arbitration clause which stated that three arbitrators should decide the case, with one arbitrator being appointed by each of the parties. In this case the arbitration clause was far from workable. There was no way that the parties could identity a third arbitrator and the arbitration proposed by the parties fell by the wayside. The parties could not agree on how the royalties claim should be resolved, and a number of proceedings ensued in England and India.
The seat of arbitration is important as that determines the national law in which parties place the process. The arbitration clause named London as the ‘venue’ of arbitration but stated that the provisions of the Indian Arbitration and Conciliation Act 1996 applied. As a result, the parties could not agree on whether the seat should be England or India, and EIL issued proceedings in India asking for an order that the agreement was not binding and so neither was the arbitration clause.
Progress in the Indian litigation was slow, and Enercon decided that to try to push things along, it would issue Court proceedings in England. Enercon asked the Court to allow service of an Arbitration Claim Form outwith England on the basis that the seat of arbitration would be in England, to appoint a third arbitrator and to grant an injunction restraining the Indian litigation.
EIL challenged the jurisdiction of the Court to allow the arbitration claim to be served on it on the basis that the seat of the arbitration was not London but India. EIL argued that in any event it was for the Indian courts (rather than the English courts) to determine the location of the seat of arbitration.
In the judge’s view, the seat of the arbitration was clearly England. He also expressed concern about the time it would take the Indian court to reach its decision. Ultimately however, his view was that “for good or for ill” Enercon were involved in the Indian proceedings and he would not interfere with that. Enercon were left with no option but to await the outcome of the Indian process.
Arbitration should be a quick alternative to traditional Court proceedings, but this case illustrates that failure to be clear on the proposed arbitration process can negatively affect the case and cause excessive delay. A lack of clarity can allow one party to take a tactical advantage by delaying the outcome of the dispute and increasing costs that are of no benefit in resolving the underlying dispute. As the Judge stated in Enercon, “The author of Bleak House would be appalled by this story”.
Investing time at the outset to be clear in your contract how a dispute is to be resolved should improve parties’ chances of bypassing years of preliminary argument and concentrate on resolving the underlying dispute itself.