Tuesday, September 16, 2014

Common Issues Arising from Dispute Resolution Clauses

When drafting commercial contracts, one must be particularly careful in ensuring that all legal and commercial terms are unambiguous and carefully constructed. This is especially true for dispute resolution clauses. This article explores common issues that arise from poorly constructed dispute resolution clauses, and suggests tips on how to ensure that these clauses are succinctly drafted.

Venue and Applicable Law

All dispute resolution clauses should specify:

  1. the venue (i.e., the courts of a selected country or arbitral venue); and
  2. the substantive law which governs the underlying contract.

In instances where the parties grant jurisdiction to the domestic courts of a specific country, issues of venue and applicable law are invariably interlinked. By way of illustration, whilst various provisions within the Basic Law of Oman permit Omani Courts to do so, from a practical perspective, Omani Courts will likely refuse to apply the substantive law of a foreign country. Thus, for example, if the parties select Omani substantive law as governing law, the parties must ensure that the dispute is heard in Omani Courts, and not the Courts of a foreign jurisdiction, such as the London Courts. Thus, it is necessary to specify that the substantive law of Oman applies, and to grant the Honourable Courts of Oman exclusive jurisdiction to review any future dispute.

It is important to note that the situation is different with regards to arbitration. Parties may select the substantive law of any country if arbitration is the parties’ selected method of recourse, subject to enforceability issues. For this reason, and for the reasons discussed below, it may in the party’s best interest to opt for arbitration, and not for litigation, in certain instances.

Enforceability of a Final Judgment and Location of Assets

A party must ensure that any final judgment granted in its favour is readily enforceable in all relevant foreign jurisdictions. This is especially true where the opposing side is a foreign entity with assets vested offshore. Otherwise, a party may risk not being able to collect on a judgment if the opposing side refuses to satisfy the conditions of the judgment, and does not maintain assets in a jurisdiction where an Omani court judgment may be swiftly effected.

The 1996 Treaty for the Enforcement of Judgments, Judicial Delegation, and Courts Summons (the “GCC Convention”) has made all Omani Court judgments readily enforceable throughout the GCC. Thus, if the opposing side has considerable assets in a neighbouring GCC country, a final binding Omani court judgment will be valuable, as it will be honoured and readily enforceable. However, recognition and enforceability of an Omani Court judgment in other foreign jurisdictions may vary, or perhaps be unclear. As such, for this reason alone, it may be safer to opt for arbitration in certain instances.

In contrast, due to Oman’s ratification of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), it may be easier to enforce arbitration awards in certain foreign jurisdictions. The New York Convention requires all co-signatories to honour and enforce all arbitral awards rendered in each respective member country, without review of the merits. There are currently 149 countries that have ratified the New York Convention, including the United States, and the United Kingdom, among others. Thus, arbitral awards rendered in the Sultanate will be enforceable in other signatory countries.

Recommendation: be specific and vigilant in drafting dispute resolution clauses

For the reasons provided above, it is important that dispute resolution clauses, including all aspects of venue and substantive law, are concise and carefully drafted. We recommend that these clauses are customized for each specific contract.