Disputes

Deciding how a dispute will be resolved

It is important to have a process in your contract setting out how any dispute will be resolved. There are a number of methods available including:

• formal negotiations
• escalation of the dispute to senior management
• mediation – a flexible and confidential process in which a neutral third person helps resolve the  dispute outside the formal legal system
• expert determination – an independent third party is selected to act as an expert, to decide the dispute outside the formal legal system.  This process is useful if specialist technical knowledge is required or if you want to “fast-track” a decision
• arbitration – an independent third party is appointed to legally decide the outcome of a dispute.  Although similar to court proceedings, the procedure can be adapted to suit the parties’ preferences and (unlike court proceedings) it is generally confidential
• court proceedings (litigation), resulting in a binding court judgment.
  

A combination of these methods is possible – for example mediation, followed by arbitration if the mediation fails to produce a successful agreement. Or you might want your contract to allow for expert determination for some types of disputes (such as valuation disputes) and arbitration/mediation for others.

Tips for negotiation, mediation and expert determination

If you choose mediation or expert determination you will need to decide how the mediator or expert will be appointed. You can do this by agreement with the other party. However, the contract should outline what will happen if the parties cannot agree. It is usual to state that if the parties cannot agree a nominated institution or person (eg the president of the local or national Law Society) will select the mediator or expert.

Think about whether you want formal negotiations or mediation to be a compulsory step before litigation or arbitration, or just a voluntary option.  Making them compulsory can be helpful, but can also delay final resolution of the dispute. You could agree a deadline for the conclusion of any negotiations or mediation (you can always extend this if the other party agrees). If you can’t meet the deadline either party can go to litigation or arbitration. Try and keep the process as simple as possible.

Advantages of arbitration in the international context

In many cases arbitration will be more suitable than litigation for resolving international disputes:

• you can avoid local courts, which you may not trust or be familiar with 
• it allows for an agreed (or independently appointed) arbitrator to decide the outcome
• it can result in a speedier outcome than going through local courts
• there is limited ability to appeal or review an arbitration decision (known as an ‘award’), which may give you more certainty than a court judgment
• most importantly, it is generally easier to enforce an arbitration award in other countries than it is to enforce a court judgment.

Arbitration clauses

If you want arbitration you must state this in your contract. You will need to outline at what point the dispute can be referred to arbitration. If you don’t do this either party may start legal proceedings in the courts. 

An arbitration clause should cover at least the following points:

• a description of what a dispute is, and a requirement that a dispute be referred to arbitration
• the number of arbitrators, and how they will be selected.  It is usual to have one or three arbitrators – use an odd number to avoid a deadlock
• the “place” of arbitration (usually specifying a city and country) – this is crucial for cross-border  transactions as the place you select will often dictate what procedural law will govern
• the rules that will apply to the conduct of the arbitration (see below)
• the language used (so you won’t have to pay for the documents to be translated).

Types of arbitration

You will need to decide whether you want an “institutional” or “ad hoc” arbitration. 

Institutional arbitration: the dispute is run according to procedures set down in the specified institution’s rules. The three best known are:

• the International Chamber of Commerce (ICC)
• the American Arbitration Association (AAA)
• the London Court of International Arbitration (LCIA).

These institutions provide administrative functions that support the arbitrator or, in some cases, supervise the arbitration. 

 “Ad hoc” arbitration: The parties select their arbitrator and then either draw up their own set of rules, use an existing set or allow the arbitrator to set the rules.

An arbitration that takes place in New Zealand (including an international arbitration) will be governed by the Arbitration Act 1996. The Arbitration Act includes rules based on international commercial arbitration (the United Nations Commission on International Trade Law Model). Parties to an international arbitration can opt out of some of the rules, but the Arbitration Act provides the default position. 

Always seek legal advice before agreeing an arbitration clause for a cross-border transaction. 

Choose what law will govern the contract 

Regardless of the dispute resolution method you choose your contract should state which country’s law will govern the contract. 

Under New Zealand law, parties to a contract are generally free to decide which country’s laws will apply. The governing law will decide whether a contract has been properly formed, how it will be interpreted, obligations under it and if those obligations have been breached. A New Zealand court will apply the selected law (even if it is not New Zealand law) to a dispute as long as the law is made in good faith, is legal and there is no public policy reason for avoiding that choice (eg to avoid a mandatory New Zealand law). 
You do not need to choose New Zealand law or the local law of the other party. For example, two parties based in New Zealand and Hong Kong could choose English law to govern their contract.  The parties might choose to do this if they were not familiar with the other party’s laws but agreed to compromise by choosing another country’s laws. 

Be aware that not all countries allow as much freedom in choosing the governing law.

Under New Zealand law, if your contract does not state the governing law, the courts will choose it by identifying a legal system with the closest and most real connection with the transaction. That legal system’s laws will then govern the contract (and the dispute). Other countries may adopt a different approach, so leaving this up to the court to decide may result in costly uncertainty.

Enforcement of foreign decisions

Once you have a final decision about a dispute, it will need to be enforced.  Different rules apply to litigation and arbitration decisions. Your ability to enforce the decision will depend on the country you need to do it in.
As a general rule, it is easier to enforce an award from an international arbitration than it is to enforce an international court judgment. 

That is because many countries, including New Zealand, have agreed to recognise and enforce international arbitration awards in the same way as they enforce domestic arbitration awards. Countries who have not yet agreed include a number of Pacific Islands and Taiwan. 

Some countries, like New Zealand, will only enforce awards where the other country is a signatory to the same convention (the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards).

Each country has different rules on when it will enforce a foreign court’s judgment. 

• If you want to enforce a New Zealand court’s judgment in another country, you will need advice from a lawyer in that other country on whether it is possible and how to do so. This may not be straightforward. It may depend on any reciprocal arrangements between New Zealand and the other country.
• Consult a New Zealand lawyer if you need to enforce a foreign court’s final judgment in New Zealand, as there are different ways of doing this. 

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Use of the information contained in this guide is at your own risk and we are not responsible for any adverse consequences arising out of such use. This is a complex area and we recommend that you seek legal advice before taking any related action.