Resolving Disputes with Foreign Customers and Suppliers
By: RICHARD E. WEINER
November 2008
Many American companies source their products and equipment from suppliers overseas. Some of them even sell plants or equipment to customers in foreign countries. What many of these companies fail to realize is that a dispute between them and their foreign customer or supplier can have serious legal and financial consequences for their company.
Disputes between a U.S. company and its foreign customer or supplier can take many forms: disagreements over construction, operation, maintenance, quality, performance standards, and payment for the plant or equipment. However, the options for resolving disputes that the U.S. company and its foreign customer or supplier cannot settle on their own are much more limited. One option is to commence a lawsuit against the foreign customer or supplier in the United States. This option has several inherent problems. First, the U.S. company must show that the foreign customer or supplier has enough contacts with the state in which the lawsuit is filed in order to be hauled into court there. Simply having a contract to supply equipment to a company in that state or engaging a company in that state to build a plant overseas may not be enough of a connection with that state to convince a court that it has the authority to force the foreign customer or supplier to participate in a lawsuit there.
But even if the U.S. company can force the foreign customer or supplier to defend itself in a U.S. court, it will be even harder for the U.S. company to enforce any judgment that the U.S. court may render against the foreign customer or supplier. Unless the foreign customer or supplier has assets in the United States that the U.S. company can attempt to seize, the U.S. court judgment may be a hollow victory for the U.S. company. There simply is no easy legal mechanism for the U.S. company to enforce the judgment in the court system of the country where the foreign customer or supplier is located. Many foreign courts will not honor the U.S. court judgment and will require the U.S. company to re-commence its lawsuit against the foreign customer or supplier in the foreign court.
Another option for the U.S. company is to file a lawsuit in the court system in the country where the foreign customer or supplier is located. This option has its own set of problems. First, commencing a lawsuit in a foreign court can be costly and time-consuming. It may require the U.S. company to send employees to the foreign country for extended periods of time. It may require the U.S. company to deal with a set of laws and regulations that it may not understand in an unfamiliar court system in a foreign language. The U.S. company may have to worry about “home court” advantage: the possibility that the foreign court or the foreign laws will inherently favor the foreign customer or supplier.
When disputes arise, some U.S. companies and their foreign customers or suppliers ultimately agree that their disputes should be heard by a court in a neutral country. This often is the worst of both worlds. The court may refuse to hear the case because one or both of the parties lack sufficient contacts with the jurisdiction. Either or both of the parties may lack a sufficient understanding of the country’s court system or laws and regulations. Any judgment rendered by the court may be difficult to enforce if the losing party has little or no assets that can be seized by the prevailing party in the country where the court is located.
For all of these reasons, many U.S. companies and their foreign customers and suppliers often opt to have their disputes settled in arbitration. The advantages to settling disputes in arbitration are many. First, arbitration is often less expensive and time-consuming than litigation. Second, the parties to the arbitration can often determine what laws and rules should apply in the arbitration proceeding. Third, the parties may actually select the arbitrators who will hear the case. But most importantly, the award rendered by the arbitrators will be enforceable through court systems in many countries around the world. This is due in large part to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty that provides a mechanism to have foreign arbitration awards honored by courts throughout the world. Many countries have signed this treaty and will honor an arbitration award rendered in accordance with the treaty.
Generally speaking, arbitration will offer the U.S. company and its foreign customer or supplier more options than litigation. There are a variety of internationally recognized arbitration systems from which the parties may choose, such as the International Chamber of Commerce Arbitration Rules and the United Nations Commission on International Trade Law Arbitration Rules, that will allow the parties to determine the procedural rules to be followed during the course of the arbitration. These rules establish the guidelines for the arbitration proceeding itself, for example, the type of evidence that may be presented during the arbitration, how long the arbitrators may take to come to a decision, and even whether the losing party should pay the costs and expenses incurred by the prevailing party in the arbitration.
Takeaway
The U.S. company and its foreign customer or supplier should discuss the strategy that they will use to resolve their differences in the event that they are unable to resolve them by themselves. The strategy that they choose should be set out in detail in their contract. A well-drafted arbitration clause in the contract will often provide a framework for the efficient settlement of such disputes. It will usually provide the parties with a system that is more fair and flexible than they might find in various courts around the world.
This article originally appeared in Biodiesel magazine, February 2008 issue and is being reprinted with permission.