Why choose Alternative Dispute Resolution Mechanism for International Contracts

By Harshvardhan Tripathi, for Legal Corner LLP. Harshvardhan is a fourth year student of NALSAR University of Law and will be graduating in 2022. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you are planning to consider incorporate or expand your existing business in the US so as to get legal advice that is specific to your business needs. 

When entering into business agreements with entities based in other countries, parties must pay keen attention to the crucial question- what happens when a dispute arises between the parties? At first, discussing the scenario of failure of agreement even before parties have established contractual relationships might appear strange. However, having clarity over the dispute resolution mechanism saves time, money and efforts in the case of a potential conflict between the parties. In order to prevent hassle later on, the contract must include a clearly drafted and precise dispute resolution clause.

Parties based in different jurisdictions are generally unwilling to submit their disputes to the courts of the other countries due to reasons such as logistical difficulties, chances of mistrial and bias, complicated unfamiliar court procedures, language difficulties etc. Instead of pursuing litigation, parties instead prefer Alternative Dispute Resolution (‘ADR’) mechanisms such as Arbitration, Mediation and Negotiation.

The following are the benefits of ADR mechanisms over litigation that parties can consider before negotiating the dispute resolution clause:

1. Confidentiality

The biggest attraction of ADR proceedings is that, as compared to litigation in a public court, they are private and confidential. Oftentimes, the parties sign a Non-disclosure agreement to ensure that all information shared and revealed during the proceedings remains private. The benefit of privacy allows the parties to focus more on the details of the dispute rather than worrying about the loss of reputation or loss of public image or any detriment that might be caused due to sharing sensitive information. Especially when the dispute surrounds discussion of trade secrets or Intellectual Property issues, privacy becomes a key concern for the parties.

2. Easy Execution

As compared to litigation that involves many players to participate, ADR mechanisms are convenient because they only require the counsel of legal experts to execute. ADR mechanisms provide a single method of negotiating disputes and this saves the parties from the complexities and cost of multi-jurisdictional litigation.

3. Effectiveness

One of the biggest disadvantages of litigation is that if one of the  parties is disgruntled by the court ruling against them, they can appeal the decision and drag the matter for a prolonged period of time. Therefore, even if a party has a court decree in its favour, its effectiveness might become redundant because of delay and cost. ADR mechanisms provide the advantage of finality- usually ADR resolves cannot be appealed in the manner a court decree can be. Thus, an ADR resolve reached by the mutual consent of parties can be immediately given effect without worrying about another round of challenge.

4. Flexibility

In a litigation proceeding, parties are bound by the prevailing general law of the land, and there are very few opportunities of customizing proceedings according to their convenience. However, ADR mechanisms provide parties the autonomy to decide all major factors of considerations, for instance, the forum of filing dispute, the laws governing the disputes, the laws governing the procedure of the proceedings, language, time limit of completion of the proceedings, number and name of adjudicators, location etc. This gives parties greater control over the resolution of their dispute.

5. Speedy and cheaper resolution of disputes 

It is generally seen that courts of most countries are overburdened and clogged with huge pendency of cases. The situation is especially worrying in countries with dense populations where the judicial mechanism crumbles under the weight of thousands of pending suits. A commercial party might have to wait for years if not months before the matter is heard by the court, and then wait more for further rounds of litigation. This not only makes getting speedy resolution virtually impossible but also drives up the legal cost significantly. Even after investing substantial time and money into it, there is no guarantee that the court would necessarily rule in one’s favor. As compared to this, ADR mechanisms are speedy because the parties can settle the disputes amicably in fewer meetings that are conducted as per pre-decided timeline.  This saves the cost because one does not have to employ the services of Legal Counsels for all those years that matter is pending before the court, but instead their professional service is required only for a few sessions.

If you have any questions on choice of law, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.