Dispute Resolution Clauses

Contradiction in terms

Originally published in the September 2008 issue

Commercial partners, like marrying couples, rarely think about divorce when tying the knot. For this reason, dispute resolution provisions are sometimes overlooked when drafting hedge fund agreements, and other contractual documentation.

In fact, it is not uncommon for parties to discover on the emergence of a disagreement, that a contract or series of contracts in the same transaction contain dispute resolution provisions which conflict. This issue might arise, for example, when parties in a derivatives transaction have agreed to general terms under an ISDA Agreement, but to different terms for each particular swap or trade. Parties frequently waste valuable time and money fighting side battles on difficulties, including how or where disputes are to be resolved.

This article looks at how English courts have resolved issues of this sort, and offers some practical guidance to avoid problems before they arise.

Arbitration and litigation

In Paul Smith Ltd v H&S International Holding Inc [1991] 2 Lloyd’s Rep 127, the court was faced with a clause requiring disputes to be settled through arbitration, but which also provided for the exclusive jurisdiction of the English courts. English courts are reluctant to void a dispute resolution clause for uncertainty, and, like many national courts, tend to favour agreements to arbitrate. Here the court interpreted the clause as an agreement to arbitrate with a provision for the English court to retain a supervisory function. There is no guarantee though that if the matter came before arbitrators, or before other national courts at the enforcement stage, they would take the same view.

While other English cases follow Paul Smith, some view clauses providing for both arbitration and litigation as being ‘untidy’ or vulnerable. In MH Alshaya Company WLL v Retek Information Systems Inc [2001] MCLR 99, one document provided for arbitration and court jurisdiction and another related document for litigation only. The court found that the litigation provision prevailed and viewed the arbitration clauseas weak. The case has been criticised, but the same principle might be followed where an arbitration agreement is unclear on its face.

Different jurisdictions

In Credit Suisse First Boston (Europe) Ltd v MLC (Bermuda) Ltd [1999] 1 Lloyd’s Rep 767, the court was faced with a dispute involving a complex bond transaction, where agreements provided for English jurisdiction and related agreements for New York jurisdiction. MLC commenced proceedings in New York. Credit Suisse applied to the English Court for an anti-suit injunction to stay the New York proceedings.

Judge Rix rejected the suggestion that the court should seek to interpret a series of agreements to mean that disputes relating to them should be settled in the same jurisdiction. Instead, he found that: “where different agreements are entered into for different aspects of an overall relationship, and those different agreements contain different terms as to jurisdiction, it would seem to be applying too broad and indiscriminate a brush simply to ignore the parties’ careful selection of palette.”

This approach, however, was cast into doubt by the recent House of Lords case, Fiona Trust [2007] UKHL 40.

Fiona Trust dealt with the question of whether an arbitration agreement could be upheld where there were allegations of bribery in connection with the underlying contract, and whether the issue of bribery fell within the scope of the arbitration clause. The Lords found the answer to both questions to be “yes”. Lord Hoffmann held that there was a strong presumption that commercial parties intend all disputes to be determined in a single forum.

Some thought that Fiona Trust would open the way for courts to overlook the plain meaning of apparently contradictory dispute resolution provisions in multiple agreements, and to insist that disputes be settled in a single forum. This was not the case. Instead, in two very recent cases, the lower courts have shown a preference for the approach taken in Credit Suisse.

UBS AG v HSH Nordbank AG [2008] EWHC 1529 dealt with a complex credit swap transaction involving notes issued by a company set up by the claimants. The transaction was governed by multiple agreements, some providing for non-exclusive New York and some for exclusive English clauses. The claimant issued proceedings in England. The defendant issued in New York on the same day, and applied to stay the English proceedings in favour of New York.

Judge Walker found that although Fiona Trust suggested that courts would presume that parties intend to follow a single dispute resolution mechanism, the presumption could be displaced. The question is: what would the clause mean to a reasonable person knowing the background to the transaction? In this case, he found that each jurisdiction clause relates to the contract in which it is found. Here, the main focus of the claim involved the agreement containing the New York jurisdiction provision, and the dispute would have to be settled there.

ACP Capital Ltd and another v IFR Capital plc and another [2008] All ER 163 involved a complex refinancing transaction with several agreements. One agreement included a Jersey jurisdiction clause, and other agreements included English jurisdiction clauses. The agreements containing the English clauses were signed later than the Jersey agreement.

The claimants claimed under an agreement containing an English clause. The defendants counterclaimed in England under the agreement containing the Jersey clause. The claimants applied for a stay of those proceedings arguing that they should be heard in Jersey. The defendant sought to rely on Fiona Trust, and the fact that the English agreements were later in time.

Judge Beatson found for the claimants. He could not find that “jurisdiction choices carefully made in a contract are impliedly abrogated by a different jurisdictional choice in another contract of a different type”. This, he said, would lead to “startling results.”

Fiona Trust, he said, was not relevant. That case dealt with a single clause, not a number of clauses in a series of contracts between different parties, carefully drafted with the assistance of lawyers.

Although the above cases were decided on their own facts, it would seem that courts generally will adhere closely to the wording of dispute resolution clauses, but this might not always lead to a quick, correct or convenient result.

Practical considerations

While it is not easy to predict how courts will approach the issues in any particular dispute, the following practical pointers are useful to bear in mind:

  1. Consider at the outset of a commercial relationship
    the types of disputes which are likely to occur and
    how and where these should be best resolved. It
    will nearly always be simpler if disputes arising
    from one transaction can be resolved through one
    dispute resolution method and in one jurisdiction.
  2. Consider using tried and tested wording when
    drafting dispute resolution provisions, including
    model litigation and arbitration clauses. Bespoke
    clauses often lead to confusion and uncertainty.
  3. If it is necessary for different agreements within a
    transaction to contain different dispute resolution
    provisions, the clearest language should be used.
    Provision should also be made in the event of
    overlap or conflict, for instance by providing that
    in such circumstances one dispute resolution
    clause prevails