Containment of Cross-Border Contract Disputes

You are an executive of a U.S. corporation resident in the State of New York. You are responsible for negotiating and closing a Cooperation and Development Agreement pursuant to which your corporation as contractor (the “Contractor”) intends to develop a complex system consisting of software and hardware with autonomous driving functions (the “System”) for a German car manufacturer (the “Principal”). You expect the System to embody significant newly developed software code and know-how.

The know-how that the Contractor will use for the expected work results and the related methodology are the intellectual property at the core of the Contractor’s business. Some of your colleagues refer to these as the “Crown Jewels”.

You have agreed the key commercial terms with the Principal, but not the small print, notably applicable law and dispute resolution. The Principal proposes German law and a German forum.

The Standard Approach

The standard approach would be the homeward trend:

  • You propose that disputes be resolved by the courts of New York und the substantive law of New York.

  • The Principal will propose that disputes be resolved by the German courts under German substantive law.

Thus, if the Principal has superior negotiating power, you may end up subjecting the Contractor to litigation before German court. The best you can hope for is a compromise pursuant to which disputes would be resolved by the courts of a third country perceived as ‘neutral’, say England or Switzerland, under local substantive law.

You may also agree on an arbitration clause, considering that arbitration proceedings are easier to initiate across borders, depending on the circumstances, and that under the UN-Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention) arbitration awards are more easily enforceable internationally than court judgments.

You are not satisfied with this approach.

  • You are concerned that a time may come where the Principal tires of the long and arduous development process, reevaluates the project and decides to get out. What used to be a productive relationship will then quickly turn into an expensive, but unproductive dispute, as it happened in the English e-borders case ([2014] EWHC 4375 (TTC)). The dispute would be unproductive because it would focus on legal positions, e.g. whether a notice of termination was valid or what amount of damages the Principal can claim, rather than the parties’ commercial interest in being able to obtain and operate the System.

  • The dispute may even endanger your Crown Jewels if it forces you to defend the Contractor’s know-how relative to the Project. Courts or arbitral tribunals may not be able to keep third parties, notably competitors, from gaining knowledge of the know-how at issue in the proceedings.

As a result, if you follow the standard approach, you might be headed for expensive, unproductive proceedings where the Contractor may not even be able to protect its Crown Jewels.

The PSP Approach – A Practical and Safe Dispute-Resolution Process

Even though you would prefer New York law to govern the contract, you may want to compromise on the issue of applicable law if in return you get a practical and safe dispute-resolution process. Most importantly, you want a process that gives the parties room to pursue their commercial interest, sort out their differences and find their own solutions to the problem without wasting time and money on asserting merely legal positions in costly and lengthy litigation or arbitration proceedings.

This goal can be reached if the parties agree on a so-called Escalation Clause, i.e. a dispute-resolution clause providing for mediation before the parties may file a complaint with a court or arbitral tribunal:

  • The first step should be mediation. Mediation is a voluntary, confidential process where the mediator assists the parties in discussing and resolving their differences consensually. The Mediator has no power to decide the merits. Therefore, the parties will focus on discussing commercially viable options to make the most out of the development project and will almost always find a consensual solution. This in turn helps to preserve the business relationship between the parties and opens the door for new business. Legal positions may be considered but will not take center stage in a mediation. Even if the mediation is unsuccessful, you will have learned a lot about the Principal’s interest in the case. This will inform the next steps you may want to take, but note that neither party may disclose the content or the conduct of the mediation, not even in any ensuing proceedings.

  • Even though mediation is likely to be successful, it would be wise to think ahead and provide for a decision process in case the mediation is unsuccessful. This should be arbitration rather than litigation because arbitration will make it easier for you to safeguard the confidentiality of the dispute and thus maintain the business relationship with the Principal, not to mention that cross-border litigation has a number of other disadvantages as compared to international arbitration.

Additional Insight

If you draft the Escalation Clause, consider referring to a recognized institution to manage both the mediation and the arbitration. Only recognized institutions like the International Court of Arbitration of the International Chamber of Commerce (“ICC”), the American Arbitration Association (AAA) or the German Arbitration Association (DIS) have the resources to ensure smooth proceedings for a relatively small price.

The Recommendation

Speak with PSP. We will help you sort out the options.