Module 6
Commercial Dispute Resolution
Summer 2008-09
©MNoonan2008
This presentation and Copyright therein is the
property of Maureen Noonan and is prepared
for the benefit of students enrolled in the
Commercial Transactions course conducted by
the Law Extension Committee and is available
for their individual study. Any other use or
reproduction, including reproduction by those
students for sale without consent is prohibited.
©MNoonan2008
Is this topic examinable?
Yes, it is examinable in Summer 2008-09.
Any direct questions in the examination would be
contained in Q6 and the appropriate answer
would be descriptive. This contrasts with the
problem questions 1-5.
Material can be relevant to a problem question
indirectly. E.g. How might this problem have
been avoided/better dealt with?
©MNoonan2008
Disputes
Valuable things at risk, such as:
• Time
• Money for expenses incurred trying to resolve
dispute, lost earnings
• Business relationship and future earnings
• Loss of market to competition
• Loss of reputation
• Freedom if a criminal offence and dispute is with
authorities/society.
• Political issues between states and countries
©MNoonan2008
Methods of dispute resolution
Prevent the dispute by risk management
Avoid some disputes by drafting contracts well
Negotiation
Capitulation
Mediation and conciliation
Expert determination
Arbitration
Litigation
Other: e.g. Toss a coin, force etc
©MNoonan2008
Role of the lawyer
Policy and community attitudes to cost etc of
traditional dispute resolution
Courts overworked and congested
Repositioning of a narrow profession
Opportunities to use diverse skills instead of
purely “legal” skills
Important to choose most appropriate
method for particular issue/dispute
©MNoonan2008
Role of the lawyer
• Establish dispute resolution function for an
organisation.
• Risk management especially in larger
companies.
• As a professional mediator, arbitrator.
• Management of international arbitrations
for exporters/importers/multinationals.
• Role in international organisations.
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Risk Management
Identify legal risk
Apply
Management
Technique
Monitor risk
Identify Appropriate
Management Technique
for each risk
and plan
for overall management
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Legal role in Risk Management
• Objective is to avoid dispute or minimise
damage resulting from a dispute
• Must understand business
• Conduct due diligence to ascertain main
areas where dispute/legal liability likely to
arise
• Appreciate bargaining position and
opportunities/limitations
©MNoonan2008
Some Exporter Legal Risks
Customer does not pay-unpaid seller
Unable to recover /enforce rights in foreign country
Product liability-wrong item, quality, quantity,
unsafe, late, incomplete
Unable to produce/acquire-breach contract
Loss in transit-who bears loss?
Competition cheaper-buyer defaults so they can
take advantage of cheaper opportunity
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Some importer legal risks
Goods or services inappropriate, not what was
ordered-claim for compensation available?
Supply does not meet local standards/laws
Crime –bribing foreign officials
Tax, customs issues
Unfamiliar with particular free trade treaty
provisions
Unable to enforce rights /recover money in a
foreign country
Unable to sell items purchased
Vulnerability to local customers for problems
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Some manufacturing risks
Raw material problems
Machinery
Finance
Delivery
Quality/quantity issues
Damage to others
Failure to sell products
Title issues
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Alternative dispute Resolution (ADR)
Defined by ADRA (Australian Dispute Resolution
Association Inc.) as:
Dispute resolution by processes which encourage
disputants to reach their own solution and in
which the primary role of the third party neutral is
to facilitate the disputants to do so.
Generally includes negotiation, independent expert
appraisal and mediation, but not arbitration;
which is an adjudicative process where the
parties agree that the decision of the third party
is binding.
©MNoonan2008
ADRA
www.adra.net.au
Formed 1987 with objectives:
• To promote and encourage ADR in Australia
• To encourage exchange of ideas and information re ADR
• Providing and supporting education, research
• Printing, publishing and circulating ADR info
• Enhancing professional skills of ADR practitioners
• Represent ADRA members
• Cooperate with others to achieve objectives
©MNoonan2008
Early dispute Resolution (EDR)
Reference: Law Society Task Force Report on
Early Dispute Resolution and Law Society
Dispute Resolution Committee.
EDR is concept and process of intervention in the
formal dispute process to resolve that dispute
early, effectively and legitimately
To enable EDR, need for changes in attitude by
profession, clients, the litigation process and an
increase in ADR initiatives
Complexity and inefficiency of legal system in part
due to Commonwealth/State division
©MNoonan2008
Institutionalised EDR / ADR
The Administrative Decisions Tribunal NSW (ADT)
See Judge Kevin O’Connor AM, President ADT, address to ADRA Conference 2007 on ADRA website: Institutionalised
Dispute Resolution
ADT deals with state tax appeals, FOI merit reviews, professional discipline of legal profession and others, retail leases.
Chapter 6 of Administrative Decisions Tribunal Act 1997 empowers Tribunal to
engage in 2 forms of ADR-mediation and neutral evaluation and Tribunal can
determine its own procedures. It can engage assessors, conduct preliminary
conferences and can dispense with hearing and determine matter on the
papers.
Mediation means a structured negotiation process in which mediator as neutral
and independent party assists parties to achieve their own resolution. It is
voluntary and mediators are encouraged to adopt uniform practice.
Neutral evaluation means a process in which neutral evaluator seeks to
identify and reduce the issues of fact and law in dispute. The role includes
assessing relative strengths and weaknesses of each party’s case and offering
an opinion as to the likely outcome of proceedings.
Assessors can be very helpful where special knowledge or experience is
required e.g. veterinary surgical techniques
Not always appropriate? e.g. occupational licensing, professional discipline
and tax appeals. Once a public decision has been made e.g. to suspend a
licence Judge O’Connor is of the view the process should remain public and
open.
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Industry based dispute resolution
Banking and Financial Services
Ombudsman
We have a look at this in a later module
Insurance Ombudsman
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Negotiation
Win/win mentality means both parties must
come out of the negotiation with an
improvement in their situation. Skill lies in
formulating such an outcome.
Win/loss means that one side is better off
and one worse off. May resolve immediate
dispute, but might lead to loss of
relationship, or retaliation later.
©MNoonan2008
Win/win examples
Deliver later at higher price…buyer gets
timing required and vendor is
compensated for storage/delay of receipt
Pay earlier at cheaper price
Long term contract in return for fixed price
Return unsold items in return for prime
display position
©MNoonan2008
The Negotiation process
• Prepare-Formulate desired outcome, research
possible solutions
• Choose diplomatic/respectful language
• Refrain from adversarial, bullying language.
• Consider position of the other side and any
cultural issues relevant such as importance of
saving face
• Avoid insults, name calling, emotional abuse
• Meet personally on “without prejudice” basis-at
lower level first / higher level first, neutral ground
• Exchange of emails, telephone, correspondence
©MNoonan2008
Capitulation
Sometimes there is no better alternative
e.g. in the wrong
No gain/point in spending time/money
No chance of success
Better use for resources
Best to preserve relationship for now and do
something about it later.
©MNoonan2008
Mediation
• Parties appoint a person who assists them
to reach a negotiated resolution.
• Often a person with skills to work out
win/win solution to particular issue
• Puts someone in between warring parties
and can dilute poisonous atmosphere to
enable productive consideration of issues
• Not binding on parties unless reflected in a
formal settlement agreement
©MNoonan2008
Mediation process
• Usually mediator conducts separate sessions with each
party to ascertain points at issue and respective
positions
• Mediator reflects on those sessions and formulates
possible solutions
• Mediator explains likely outcomes if dispute continues (if
adequate skills to do latter) to both parties separately
• Mediator presents possible solutions at joint session.
(Sometimes further separate sessions beforehand).
• If settlement reached, mediator formulates basic
agreement terms for lawyer to translate into agreement
or, if a lawyer, drafts settlement agreement.
©MNoonan2008
Domestic ADR
The Australian Commercial Dispute Centre Ltd
formed in 1986 by AG and Sir Laurence Street.
Established to introduce and encourage non
adversarial dispute resolution into Australia.
Works with ACICA and 2003 Memorandum of
Understanding means ACICA focuses on
international disputes and ACDC on domestic
disputes and mediation.
Compulsory mediation has been introduced into
many disputes in the regular court system.
©MNoonan2008
Expert Determination
• Sometimes resolution of a single issue at base
of dispute can resolve dispute
• E.g. specification/qualities/existence of a
substance or state of affairs, a
legal/accounting/scientific opinion on a particular
matter
• Parties nominate an expert or panel to give
opinion on that single matter
• Can agree on “papers only” or independent
tests, as appropriate.
©MNoonan2008
Expert determination in court system
Judges may refer questions to assessors or
special referees.
For example, in a building dispute, questions
for the architect or engineer.
Family court-family report after interviews of
family members
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ARBITRATION
• Parties agree to resolve disputes by
arbitration in accordance with nominated
Rules.
• Parties appoint Arbitrator or panel
• Arbitration conducted
• Decision made by Arbitrator
• Binding on the parties
• Enforceable in approx 142 countries
©MNoonan2008
Arbitration process
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Can be similar to a court process
Can be informal
Can be remote
Can be on “papers” only, i.e. written materials and no
oral hearing
Parties can choose an arbitrator with expertise in their
business
Usual to choose 1 or 3 arbitrators so no deadlock
possible
Usually confidential, so limited precedent bank to consult
/ research.
Important elements are a process, rules defining how
that works, and a timetable to keep it moving along.
©MNoonan2008
Framework for Domestic Arbitration
States have Commercial Arbitration Acts-largely
uniform and regulate domestic arbitrations
Supreme Court has power of overall supervision.
Public policy prevents parties from agreeing to
oust jurisdiction courts. Scott v Avery clauses
seek to get around that by making arbitration a
condition precedent to legal proceedings. So,
not ousting, just delaying or not primary method.
However, Commercial Arbitration legislation
prohibits any clause trying to make it a condition
precedent.
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Powers of the Court
Under s. 53 Commercial Arbitration Act 1984
(NSW) and Supreme Court Rules court
has power to refer a matter to arbitration
on application of a party or its own motion.
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Qantas Airways Ltd v. Dillingham Corporation
(1985) 4 NSWLR113,122
Construction of Qantas Centre. Q brought legal proceedings
against D claiming that because D found the building
contract onerous, it was attempting to force Q to renegotiate
by wrongful means such as delay, inducing labour unrest,
conspiracy to hinder work and fraudulently misrepresenting
that design problems made work impracticable. D applied
for a court order to send it for arbitration by an architect and
a builder or by an arbitrator mutually appointed as set out in
the Scott v. Avery clause in the contract.
The court agreed with D and stayed proceedings effectively
giving effect to arbitration clause and noted that “It is now
more fully appreciated that used to be the case that
arbitration is an important and useful tool in dispute
resolution. The former judicial hostility to arbitration needs to
be discarded and a hospitable climate for arbitral resolution
of disputes created”
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International Disputes
Advantages of arbitration
• Neutrality
• Flexibility
• Efficiency
• Confidentiality
• Enforceability
©MNoonan2008
Global Survey –International Arbitration- large
corporates- PWC 2007 – See: www.pwc.com
• 73% corporations prefer it to transnational litigation
• Advantages outweigh disadvantages
• Clear dispute resolution policy an important strategic asset. 65 % of
respondents had one. Minimised escalation and costs.
• Arbitration clause in contract can give a tactical advantage
• More than 75% arbitrations conducted under the auspices of an
arbitration institution such as ICC and London Court of International
Arbitration; with regional centres growing
• Legal consequences most important for choice of venue
• 91% liked finality and rejected idea of appeals
• Concern that experienced arbitrators scarce. 90% wanted arbitrator
with established reputation in their field and region.
• Corporations retain specialist arbitration counsel rather than usual
litigation lawyers to assist
• 91% in house counsel well informed about international arbitration
©MNoonan2008
International Arbitral Institutions
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International Court of Arbitration and ICC in Paris
London Court of International Arbitration
Swiss Chambers of Commerce and Industry
Arbitration and Institute of Stockholm Chamber of Commerce
American Arbitration Association
HK International Arbitration Centre
Singapore International Arbitration Centre
China International Economic and Trade Arbitration Commission
Kuala Lumpur Regional Centre for Arbitration
The Australian Centre for International Commercial Arbitration
International Centre for the Setttlement of Investment Disputes
Asia Pacific Regional Arbitration Group (APRAG) is association of 17
regional arbitral institutions in our area. See www.aprag.org
©MNoonan2008
Framework for International
Arbitration
UN Convention on the Recognition and
Enforcement of Foreign Arbitral Awards 1958
(The New York Convention)
When local court faced with dispute covered by an
arbitration agreement, it must stay proceedings
and recognise and enforce arbitral awards.
Incorporated into Australian law via International
Arbitration Act 1974(Cth)
Australian Centre for International Commercial
Arbitration. See www.acica.org.au
©MNoonan2008
ACICA
The Australian Centre for International
Commercial Arbitration is a non profit
organisation formed in 1985 to provide a
framework for international commercial
arbitration and to foster Sydney as a
centre for such arbitrations
See www.acica.org.au
©MNoonan2008
Arbitration Clause
ACICA recommends:
“Any dispute, controversy or claim arising out of,
relating to or in connection with this contract,
including any question regarding its existence,
validity or termination, shall be resolved by
arbitration in accordance with the ACICA
arbitration rules. The seat of arbitration shall be
(location). The language of the arbitration shall be
(language). The number of arbitrators shall be
(1,3 or Article 8 of rules).”
Note also need for choice of law clause.
©MNoonan2008
Arbitration Rules
Arbitrations are conducted in accordance
with rules chosen.
See for example ACICA Arbitration rules at
www.acica.org.au. Selections follow.
Procedural as with civil/criminal procedure
court system rules.
For other rules, see appropriate organisation
©MNoonan2008
ACICA Rules
4. Party initiating gives ACICA a Notice of
Arbitration which covers a demand for
arbitration, contact details, copy of A
clause, general nature of claim and
remedy sought and proposal re number of
arbitrators.
Notice can include detailed Statement of
Claim or that can come later
©MNoonan2008
ACICA Rules
5. Within 30 days of receipt of Notice,
Respondents submit Answer which
includes contact details, any plea disputing
jurisdiction, comments on particulars in
notice and answer to relief/remedy sought.
It may also include Defence to Statement
of claim, but this may come later.
©MNoonan2008
ACICA Rules
6. Parties may be represented
8-16 Appointment of arbitrators
17-31 Arbitral proceedings. Tribunal may
conduct arbitration as it sees appropriate
provided that it treats parties equally and
each is given opportunity to present their
case.
Usually held in private
21 Contents of statement of claim
©MNoonan2008
What does it all cost?
Appendix A to ACICA rules
Notice of Arbitration Registration fee $2,500
Admin fee
$1-$500,000
1% of amount in dispute
And upwards
Over $100m
$39,000 plus 0.02% of
amount in dispute above $100m up to maximum
$60,000.
PLUS costs of representation, presenting case.
©MNoonan2008
Attitude of our courts
Mainly support
Care must be taken when drafting to avoid
multi-party, multi-contract and multi-venue
disputes.
If arbitration clause too narrow, it may limit
range of disputes that can be settled by
arbitration
©MNoonan2008
Example
Australian company entering JV with Malaysian
company to build infrastructure in Phillipines.
You negotiate a clause submitting disputes to
Australian courts.
However, judgement may not be enforceable (no
reciprocal enforcement treaty with Malaysia),
dispute very public, and judge may have no
expertise.
Arbitral award would be enforceable (Malaysia and
Australia both signatories to NY Convention),
and can choose arbitrator(s) with expertise
©MNoonan2008
Another example
Importer of ginger from China. No choice of
law clause. No arbitration clause. Ginger
rotten.
Bring proceedings in China? Or Australia?
Vienna convention applies to sale?
Chinese law has closest connection?
Chinese law very different to ours. E.g.
limitation periods, no precedent value
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International Treaty obligations
Specialist Dispute Resolution bodies and
rules
WTO
WIPO-Domain name disputescybersquatting
UNCITRAL Model Arbitration law
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WTO dispute settlement
understanding (DSU)
Came out of Uruguay Round
Clearly defined rules and timetables
Parties/countries first discuss.
First WTO stage is good offices, conciliation.
Then a panel and endorsed (or rejected) by
WTO membership.
Appeals on points of law are possible.
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DSU timetables
60 days
Consultation, mediation
45 days
Panel set up, appointments
6 mths
Panel hears dispute and reports
3 wksPanel reports to WTO members
60 days
Dispute Settlement Body adopts report
(if no appeal)
TOTAL 1 year
60-90 days Appeals report
30 days
Dispute Settlement Body adopts
appeals report. TOTAL 1.25 years
©MNoonan2008
How the panels work
• Each side presents case in writing to panel
• First hearing-complaining country and
responding country present case
• Rebuttals-written and oral
• Experts, if appropriate
• Draft panel report given to both sides
• Interim report to both sides
• Review for two weeks
• Final report given to both sides and 3 weeks
later to all WTO members
©MNoonan2008
Remedies?
• Obligation on parties to respect ruling
• Trade sanctions possible
• Limited discussion in this course
• Reading some cases is useful
e.g. See www.wto.org and go to Case Studies
Thailand: Conciliating a Dispute on Tuna Exports to the EC
Dispute Settlement between Developing Countries-Argentina and
Chilean Price Bands
Pakistan’s Dispute Settlement with the US on Combed Cotton Yarn
exports.
©MNoonan2008
Trade with China
• Australian exports include mainly rural
products, minerals and energy-wool,
cotton, beef, dairy products, wine, iron ore,
liquified natural gas-and a few services in
education, tourism, architecture, banking
and legal.
• Also considerable outsourced
manufacturing done in China with
products/components then imported.
©MNoonan2008
Trade Disputes involving China
Resolution mechanisms include:
• Consultation
• Negotiation
• Conciliation or mediation
• Arbitration
• Litigation
©MNoonan2008
Trade Disputes involving China
• Less formal methods are preferred
• Desirable to maintain a harmonious and
consensual working relationship, so
confrontational/adversarial methods often not
helpful.
• Conciliation and arbitration therefore common
• Arbitration clauses common in JV contracts –
avoid unfamiliar Chinese court system, reduce
costs, preserve business relationships,
enforceability.
©MNoonan2008
Trade Disputes involving China
• CIETAC (China’s International Economic
and Trade Arbitration Commission) is the
mechanism China has set in place to
resolve problems in trade
• Legislative encouragement for negotiation
and conciliation first and arbitration or
litigation if that fails.
• JV contracts MUST contain provisions re
settling of disputes.
©MNoonan2008