IT Contracts

All parties are happy when entering into new contracts. But how often do they think of scenarios that may arise in case of a dispute? So if you’re getting into an IT contract, make sure your corporate lawyer negotiates it well such that you don’t need to go to court later.

Properly draft- ed, dispute-resolution provisions can reduce the uncertainties inherent in international commercial disputes. Such provisions in international commercial contracts take the form of arbitration agreements or forum- selection clauses. 

Arbitrate or litigate?

In international commercial contracts, arbitration (an alternative form of dispute resolution in which a neutral third party renders a binding decision) and not litigation is being preferred. This may be because it has little scope for the potential bias of national courts or no scope for multiplicity of appeals that prolong public litigation. 

Arbitration procedures are generally reviewed at two stages–during the negotiation of a contract and when a dispute arises. When drafting an agreement, keep the following elements of arbitration in mind. 

• Establish the place where the arbitration proceedings will be conducted and fix the procedural laws applicable to those proceedings 

• Determine the substantive law (that defines and regulates the rights and duties of parties) that will govern the disputes arising under the agreement. If it’s not defined, the law chosen by the parties to govern the principal agreement between them will be applied to the arbitration agreement as well 

• Choose the place of arbitration so that it is in a country that adheres to an International Convention providing for simple and expeditious enforcement of any award in the country where the debtor’s assets are located

• Multinationals sho- uld appoint arbitrators who are more at home with the business culture, laws and the general value system under which they usually operate.

Forum selection: A multimillion-dollar choice

Almost every international commercial dispute poses the critical question of where, and by whom, the controversy will be resolved. The answer to it determines whether a career judge or lay jury will decide the dispute, whether civil, common, or some other law govern the parties’ rights, and the procedural rules that will apply. So, a favorable forum selection can mean the difference between winning and losing, between de minimis damages and a multimillion- dollar award.

In software development contracts, it is extremely important to decide whether the laws of the developer’s country or the laws of the country to which the software is exported will apply. The lex rei sitae (the law of the place of the contract) doctrine is controversial and new solutions to identify the applicable substantive law have been proposed.

Issues regarding the choice of law arise in international arbitration and are important because:

• The parties are free to choose the applicable laws, whether or not they make an express choice
• Different laws operate simultaneously on different aspects of the arbitration
• If the parties fail to make express choices and/or fail to make clear choices, the matter will usually have to be investigated in the course of the arbitration
• The result of that determination can have a radical effect on the outcome of the dispute.

Sophisticated commercial parties know that they must plan for a potential dispute long before it arises. Often, the best (and perhaps only) time to control where and how a party wants its disputes resolved is before the deal is signed. 

Rodney D Ryder, Advocate, Supreme Court of India, is a consultant on trade and technology laws.

(To be continued)

Home ground is desirable

If an agreement is not expected to be enforced abroad, then a forum selection clause selecting a party’s home courts is often the simplest option. Enforcement abroad is not necessary where both parties have assets within the contractual forum, and particularly where the local party does not have assets elsewhere. In these circumstances, the convenience, familiarity and presumptive sympathy of a party’s home courts will usually outweigh other considerations. This applies if a bilateral or other international treaty provides for the effective enforcement of a party’s home-court judgements in its counter-party’s places of business.

Even if enforcement abroad is a likely necessity, the advantages of a favorable home-court forum will often outweigh difficulties in enforcement. This requires a party to assess on a case-by-case basis, how great the benefits of the local forum are, and how significant the enforceability issues will be.

If enforcement abroad is important or if a favourable local forum cannot be obtained in negotiations, then international arbitration in a favourable or neutral forum is generally the most desirable alternative. In almost all cases, a well-designed international arbitration agreement will ensure a dispute-resolution mechanism that is sufficiently competent, predictable and neutral to warrant acceptance. Thus, parties should have no reason to reject an otherwise attractive deal, merely because of the need to agree to international arbitration. Arbitration is often more attractive than a forum selection clause selecting a neutral judicial forum because of the greater likelihood of successfully enforcing arbitration agreements and the relative advantages of a well-designed arbitral process as compared to many national court procedures. 

Foreign ‘neutral’ jurisdictions can well be a choice in international commercial contracts, in order to avoid conflict or bias. There may be instances where the procedural and other characteristics of particular national courts (ie, discovery or jury trial) make them more attractive to a party than other forums, even if the courts are in a neutral third state.

Litigation in the courts of a counter-party or in most neutral courts (ie, those lacking proven experience in international
commercial disputes) is often not an attractive option. If such a choice is considered, it should be preceded by careful review of the consequences.