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Setting on a specific type of security during contractual negotiations is not as easy as it sounds. It is like having to choose dessert before the dinner has even started. You might want to make a safe choice in case you arrive hungry at the end of the meal, or you might not want to invest too much in case you end up not eating it at all.

Strategic choices must be made, and the person negotiating the terms of an agreement (just like the person who must decide early on its dessert) must consider all possible implications of the choices that they are early subscribing to. That is not an easy task.

The skills of knowing what to look for and what to avoid when it comes to contractual negotiations usually come from experience, meaning that one is likely to learn what works and what does not work only once they have tried it a fair number of times and seen the results.

This article gives you a shortcut, telling the advantages and problems that one might face when going for one or another type of dessert, or performance bond if you wish. Ultimately, all we can offer is to present you with the facts, the upsides and downsides of your options. The choice of the most convenient alternative (as well as the responsibility to deal with the aftertaste of your choice) remains completely yours.

Providing for Securities 

A typical negotiation of a construction contract or subcontract does not leave much room to the option of not putting a security in place. A security is a separate contract with which the principal (ie. the contractor or subcontractor) provides financial assurance to the beneficiary (ie. the employer of main contractor) of a due and proper performance of its obligations. Such financial assurance is provided by means of binding a payer (ie. a bank, an insurer, or the parent company) to the payment of a sum upon the fulfilment of certain requirements.

Technically speaking, the most common forms of securities are bonds and guarantees.

Practically speaking, the names do us no good as nomenclature is often mixed and nondescriptive.

Demand Bonds (or on-demand bonds) 

To organize the ideas hereby presented, it is important to give a name to the securities we are about to discuss. And here I will talk about Demand Bonds. I cannot, however, emphasize enough that you might encounter this type of security under a completely different name, just as you might see something called a bond which has nothing to do with the type of security I discuss here. Caution and attention to the features of the security (instead of just its name) are essential.

Concept: What I am here calling Demand Bonds are an unconditional and irrevocable guarantees that are autonomous and independent from the underlying contract where performance is disciplined.

Features: As the description above suggests, one of the main features of this type of security is that it forms an autonomous agreement from the contract signed between the parties and upon which the guarantee is made.

As one can imagine, the autonomy of such security implies the construction of a completely different legal framework in its respect. Namely, a different applicable law, a different choice of jurisdiction, and in theory a complete detachment from the terms of the contract.

Also as suggested by the name of the security itself, payment of this bond (also referred to as the “calling” of the bond) is conditioned to the mere presentation of documents. Most commonly, a declaration of the beneficiary that the principal has breached its obligations and a “demand” for payment. In simpler words, payment is made “on demand” without the need to prove entitlement nor solve any dispute.

In the international framework, this type of security is often governed by the ICC Uniform Rules for Demand Guarantees (URDG), which provide standard and harmonized terms accepted and implemented worldwide in relation to the creation, execution and calling of Demand Bonds.

Pros and Cons: Against the above summarized framework, the Demand Bonds has as one of its great benefits the fact that it does not require much for the beneficiary to obtain payment. More security for the beneficiary can also mean further room to negotiate the price in favour of the principal.

Another great advantage is the consolidated international framework of rules in which this type of security is contained. The fact that Demand Bonds are consistently governed by the ICC URDG gives a lot of predictability to the mechanism. Regardless of the legal background of the parties and of their preferences and habits, the rules are the same everywhere. In that sense, art. 34 and 35 of the ICC URDG provide that:

“Article 34. Governing law

1. Unless otherwise provided in the guarantee, its governing law shall be that of the location of the guarantor’s branch or office that issued the guarantee.
2. Unless otherwise provided in the counter-guarantee, its governing law shall be that of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.

Article 35. Jurisdiction

1. Unless otherwise provided in the guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee shall be settled exclusively by the competent court of the country of the location of the guarantor’s branch or office that issued the guarantee.
2. Unless otherwise provided in the counter-guarantee, any dispute between the counterguarantor and the guarantor relating to the counter-guarantee shall be settled exclusively by the competent court of the country of the location of the counter-guarantor’s branch or office that issued the counter-guarantee.”

At the same time, in case the principal finds that the beneficiary is calling the bond inadvertently, the framework of on-demand bonds does not leave much room for manoeuvre.

That is because, being the payment based on a simple “demand”, no objections to said payment are allowed on the basis of the underlying contract.

That does not mean that there is no room for the principal to object to the payment, but the room is certainly very narrow.

Having the payment of this type of security blocked requires obtaining an injunction from National Courts.

The requirements for obtaining such type of relief, therefore, will be contained in the applicable law to the demand guarantee, as well as in the procedural requirements for obtaining relief before a specific national legal system.

While most of the systems have extremely narrow approaches as to exceptions that allows for blocking payment of an on-demand bond, it is also true that most exceptions generally cover cases of fraud.

Identifiable elements: as discussed above, the name of the security – in itself – might not be enough to help you characterize it and understand its applicable legal framework. In the case of the security that I am here calling “on-demand bonds”, these are the words that you should look out for: “on first demand”, “without objections”, “unconditionally” or “notwithstanding any objections from the Contractor”. Whenever those type of words are present in the terms being negotiated, an on-demand Bond is about to be put in place.

Performance Guarantees

This is the second type of security discussed in this article. Once again, you might encounter what I hereby call performance guarantee by a different name, so let us focus for now on the characteristics of this particular tool.

Concept: within the context of this article, Performance Guarantees are dependent and non-autonomous type of securities to guarantee payment in case liability arises from a specific contractual relationship.

Features: Differently from the on-demand bonds, the Performance Guarantees are a much less “automatic” method of guarantee. In essence, they consist in a contract binding a third party to pay the beneficiary the amount agreed in case of liability of the principal.

The key element to be considered here is the term liability. That is because the liability which triggers the payment of the security cannot be grounded on the basis opinion of the beneficiary, but it has to be factually (and sometimes legally) established.

Because intrinsically connected, and thus dependent, on the underlying contract of the main contractual obligation, performance guarantees are usually contained within the framework of the parties’ main agreement itself. That means same governing law, same method for dispute resolution and so on.

There are no unifying international codes for regulating this specific type of security, meaning they usually just take the form and essence of the terms provided by the frameworks of national laws.

Pros and Cons: One of the great features of the performance guarantee is the assurance that it provides to the principal, which will be able to avoid payment of this type of security until the existence of liability if finally proved. In other words, in case of a dispute of the parties regarding the liability for a certain event (which we know as practitioners that is often the case), payment will be conditioned to a determination of the court/arbitral tribunal with regard to the liability.

Another benefit of this specific type of guarantee is the fact that it is so intrinsically connected to the agreement itself that it can almost be treated, disputed and contested all within the context of the main dispute. No need to resource to interim relief injunctions, to have proceedings going before different national courts, or parallelly before national courts and arbitral tribunals, nothing of the sort. One dispute, one adjudicator and one forum would suffice to cover it all.

On the other side of sword, this type of security provides for a slower process of payment of guarantee, a more complex and uncertain mechanism which might not work in favour of the beneficiary. Because the payment in this case is attached to the resolution of the merits of an eventual dispute, the assurance that the beneficiary has of being paid when needed (as, for instance, in face of a claim vis-à-vis the main client) is far more distant.

Identifiable elements: there is no specific rules as to what performance guarantees can be called and the best way to make sure that you are in front of one is to guarantee that none of the element mentioned above for on-demand bonds are present. In essence, what you will find here is a third-party guaranteeing payment upon a “determination of liability” or a “final decision on the liability” or even “when a party is charged with” something.

How to choose

That is the million-dollar question.

The answer will clearly depend on the interests of your client and on the consideration of all possible outcomes in case of an eventual dispute.

As a rule, beneficiaries tend to push for an on-demand bond while principals tend to prefer performance guarantees. Preferences and favourites, however, may play a little role in the negotiation table depending on the bargaining power of each party.

There is no doubt, however, that given the features and pros and cons of each option, the choice can certainly influence on the negotiated price.

The weight of the choice may also be minimized depending on the applicable law and forum choice of the parties. For instance, even if parties choose for an on-demand bond, they can certainly mitigate the difficulties of disputing said bond by choosing a specific governing law and jurisdiction forum that is similar (if not the same) of those of the main contract. That would certainly help mitigate the risk of conflicting decisions.

In summary, there should be no surprise if the answer to the question “which type of security should I choose?” is “it depends”. It is up to the negotiating party to understand on which elements they are willing to concede, which they simply cannot waive and how to translate those interests into a functioning mechanism of security which will guarantee payment to the beneficiary in accordance with the parties’ intention.

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Having to arbitrate a case is – in itself – a difficult task that can cost a lawyer (and thus also the client) a lot of effort, time and money. Having to add an entire discussion about the arbitration agreement to the dispute only complicates things. No doubt that there is longstanding jurisprudence on how to interpret and enforce arbitration agreements. And the truth is that whatever problem you may encounter, either case law or scholar’s opinion will have a solution for it. But that is not what this article is about. This article is not about finding a solution to a problem you might encounter. This article is about what you can do to avoid (or at least mitigate) those problems in the first place.

As a lawyer, you should be eager (or at least I am) to discuss the substance of the case instead of having to dedicate time and resources fighting about “who has jurisdiction”, “is the clause valid”, “can the party go to arbitration”, and so on.

One of the best ways to make sure that your dispute will be as limited as possible to the merits of the case, is to invest in a good arbitration agreement. 

To assist in that task, here there are 7 golden rules to “bullet proof” your arbitration agreement.

1. Make clear which dispute resolution method you are choosing

It might seem obvious, which is probably why people in charge of negotiating contracts end up not paying attention to it. Those who work in the sector know that it is not rare for there to be a dispute concerning the parties’ choice for method of dispute resolution. Such type of dispute can arise, for instance, when the parties – even though choosing to go to arbitration – leave in their contract certain terms that might contradict the parties’ derogation from state court jurisdiction. That was the case in Mindstar v Samsung, decided by the Ontario Court in 1992. It concerned a contract that contained a reference to arbitration as well as to a clause granting Mindstar the “right to sue”. Mindstar interpreted its own “right to sue” as the right to claim compensation in court and brought a claim against Samsung before the Ontario Court. Samsung, then, requested the stay of the proceedings claiming that the reference to “right to sue” would not overturn the parties’ choice for arbitration.^[1] In that case, the decision was in favour of Samsung (and arbitration) and the court proceedings were stayed. That, however, is not always the outcome. In a different case decided by the Supreme People’s Court in China^[2] the court examined a very contradictory arbitration clause which read:

“Arbitration: All disputes shall be settled in a friendly way, if not, then the Hong Kong law will be used for final settlement of dispute. The decision made by Hong Kong Court will be final and binding for both parties. The fees and all costs of the arbitration will be born by losing party.”

Here, the case also concerned a party’s request to stay court proceedings in face of the existence of an arbitration agreement. However, unlike the previous case, the highest court in China refused to stay the proceedings on the basis that the arbitration clause was ambiguous and could not be specifically enforced.

That to say that there is no assurance of the outcome when facing this type of situation. Nonetheless, a good way to stay clear out of such type of discussion is to make sure to unambiguously indicate one – and one only –method of dispute resolution in the contract.

2. Pay close attention when inserting “attempts to negotiate”

Another issue that can certainly cause problems in your arbitration agreement is the careless insertion of “attempts to negotiate” or the need to “try to find an amicable solution” before going to arbitration.

When parties are negotiating a contract, it does make sense that they wish at least for a chance being given to solve a dispute amicably before seeing themselves being brought into an arbitration. The problem here lies on the fact that – if the perimeter of this attempt to negotiate is not clear enough – once the parties begin to fight, there is just too much room for alleging that said pre-condition for arbitration is not fulfilled. It is true that certain courts have recognized that “… surely a party may not be allowed to prolong resolution of a dispute by insisting on a term of the agreement that, reasonably construed, can only lead to further delay …”.^[3] What is not so sure is that if you are facing the same problem, an adjudicator would decide in that same manner.

So, if you are planning to insert such type of condition in your agreement, make sure to provide in clear terms what the parties are required to do (e.g. send notices, engage in mediation, etc.) as well as a reasonable (and ideally not to long) timeline to comply with such conditions (e.g. parties are allowed to begin arbitration after x days of negotiation).

Something which may also help is to expressly provide for the consequences of breaching such provisions. For instance, whether a party’s failure to send a notice in x days can prevent them from starting an arbitration.

3. Use model clauses (but be ready to adapt them if necessary)

Something which also certainly helps is relying on model clauses provided by arbitration institutions instead of drafting a clause from scratch.

The International Chamber of Commerce, for example, provides not one but several model clauses which can be used in accordance with the parties’ needs and interests.^[4] Same thing can be said about many other major institutions: LCIA,^[5] AAA,^[6] CIETAC,^[7]HKIAC,^[8] SCC,^[9] CAM.^[10]

Using a model clause not only helps avoiding ambiguous or contradicting drafts, but also guarantees that you will have checked the box for every mandatory item that an arbitration agreement needs to contain. Seat, applicable rules, number of arbitrators, etc. That, however, is not all. The negotiator of the contract should also be prepared to adapt the text of the clause if necessary. For instance, and of course depending on the possibilities given by the applicable rules to the proceedings, due consideration should be given to the eventual need to adjust the numbers of arbitrators, to include a choice for expedited procedures, to limit or broaden the scope of the arbitration agreement, to expressly derogate from any specific provisions, and so on.

4. Be careful with providing for time limits in your dispute resolution clause

Adding time limits to your dispute resolution clause can be both a blessing and a curse. On the one hand, it might be useful to include certain deadlines within the text of your clause. That is the case with cooling-off periods during which parties are required to try to amicably settle the dispute before bringing the issue to arbitration (subject to point 2. supra). Some other time limits, on the other hand, may cause more problems than they solve. For instance, providing for time period within which a party will have to prepare their submissions is not advisable. Afterall, those issues are often covered by the set of applicable rules to the dispute. Also, leaving those specific time limits open gives room for the parties to later adapt them to the specific circumstances of the dispute. It would make no sense to have to comply with a long period for preparation of a submission when the case is a simple discussion of law. Likewise, to have to abide by a short period of preparation when dealing with a highly complex case is likely to prejudice the parties. Another time limit that should be avoided is establishing a deadline for the resolution of the dispute (for example saying that “… the dispute shall be finally resolved within X months …”). Even though it may be tempting to try to guarantee that any problems will be solved quicky, the truth is that such provisions hardly ever work in any party’s favour. The parties should have adequate time to present their case and, even more importantly, the Arbitral Tribunal should have time to decide the case without feeling pressured to rush things because bound by a short deadline. For what is worth, not mentioning a deadline is not necessarily a prejudice since most arbitration laws, as well as arbitration rules, do include provision for efficiency and expeditiousness of arbitral proceedings.^[11] On the other hand, providing for a deadline only adds the risks of having the arbitral tribunal not being able to comply with it. Consequences of such a breach can be very damaging to the parties’ interests as they include annulment of the award, loss of jurisdiction of the arbitrators, need for replacement of arbitrators and so on.^[12]

5. Indicate the law applicable to the dispute resolution clause

One of the basic principles of arbitration is the severability of the arbitration agreement. A principle that essentially entails that the arbitration agreement can be considered a separate agreement from the underlying contract in which it is inserted. That guarantees, for instance, that even in cases when the underlying contract is null, the parties’ consent to derogate from state jurisdiction remains in place. Other consequences derive from the severability of the arbitration agreement, among which the possibility to have the arbitration agreement governed by a law different than the one governing the underlying contract. An idea that is commonly known in the arbitration field. And still, parties often neglect to indicate in their contract which is the law that governs the arbitration agreement.

If the applicable law to the underlying contract is the same of the seat of arbitration, then you should probably be fine. I say probablybecause an unsatisfied party might want to discuss the matter before entering the merits of the dispute and, in the absence of an express provision, parties will likely spend time and money in that discussion. In any case, the main problem arises when the seat of the arbitration is in one place and the law applicable to the contract refers to the law of another place. It is true that there is consistent case law on the matter, but that does not necessarily make things easy. When in face of such circumstances, arbitral tribunals are likely to apply the so-called Sulamerica Test,^[13] which is a test developed within an English Case but commonly applied in arbitration. It essentially provides that the law applicable to arbitration shall be, in the first place, the law expressly chosen by the parties. In the absence of such express choice, consideration is due to an implicit choice of the parties (which one might argue to be comprised either in the choice for seat or in the choice for law applicable to the contract). In the absence also of an implicit choice, the tribunal shall consider as applicable the law with the closest and most real connection to the case (which also does not give much of a direct answer to the problem). To cut the story short and avoid the problem: make sure to expressly mention the law applicable to your arbitration agreement in your contract.

6. Think about connected contracts and their dispute resolution clause

Another issue to consider when drafting your dispute resolution clause is to coordinate it with any connected contracts. Think, for instance, about a complex commercial operation involving multiple parties. Each single operation is embedded in a different contract with different parties. A contract of supply, a contract of construction, a contract of guarantee. A main client, a contractor, a subcontractor, a guarantor. There is simply no way to guarantee that if and when a dispute arises, that dispute will not exceed the subjective scope of each contract. Instead, it is likely that the dispute will involve multiple parties and/or multiple contracts.

Starting from the assumptions that it is never simple nor easy to deal with multiparty and multi-contract arbitrations, something that would most definitely help is to have the same kind of dispute resolution in all contracts involving the commercial operation. For clauses to be compatible, they should have – at least – the same seat, same institution, same applicable rules, same number of arbitrators. Further, and depending on the rules chosen, having compatible arbitration agreements can also facilitate the request for joinder of a third party as well as consolidation of proceedings. Bottom line is, considering connected contracts when drafting your dispute resolution clause can save you much trouble.

7. Dedicate your time and attention to the dispute resolution clause

One last tip in relation to the drafting of your dispute resolution clause, which should now be apparent: dedicate time to it. It is understandable that no one would want to think about disputes when negotiating a contract, that it might not seem like a good idea to enter issues that could lead to the parties’ disagreements before the contract is even in place. However, when things are still on the table for discussion is also the moment when parties are most likely to make concessions. A good lawyer knows not to lose that opportunity. The dispute resolution clause is an important part of a contract and dedicating time and attention to its drafting can save the client’s time and money, as well as save the lawyer a big headache of having to litigate the dispute resolution method before being able to litigate the dispute.

Prevention is better than cure. 

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The seminar is designed for IP lawyers, scientists, professors, bachelor and master students, representatives of creative industries, inventors as well as anyone interested in learning IP and/or IP arbitration basics.

During the seminar they will discuss the following:
📌 what is arbitration;
📌 how can arbitration be used to solve IP disputes;
📌 the main challenges for IP in the arbitration world;
📌 leading IP cases and WIPO Arbitrations.

Speaker:
Raquel Macedo – International Arbitration Associate «De Berti Jacchia Franchini Forlani» Milan, Italy. LL.M in International Business Law

Moderator:
Mariia Bychkovska – Professional in IP of the department of educational programs and educational activities of the department of development of relations in the field of IP of SE “Ukrainian Institute of Intellectual Property” (Ukrpatent).

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The post IP DISPUTES & ARBITRATION: ALTERNATIVE WAY OF DISPUTE RESOLUTION – Webinar IP Academy, May 13th, 2020 appeared first on Studio Legale De Berti Jacchia Franchini Forlani.

International Arbitration has also had to face the COVID-19 crisis, both from a procedural and from a logistical perspective. The latter, which in a legal context is rarely critical, gained particular importance in the “transnational” scenario of the controversies brought to arbitration, which is generally characterized by travelling and meetings of people coming from all parts of the world. Meetings between clients and representatives, arbitrators discussing awards, parties and tribunal meeting for hearings, or even just the gathering of individuals for seminars and congresses aimed at diffusing the culture of arbitration. The gathering was everywhere…

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The European Court of Justice’s judgement in Slovak Republic v. Achmea has caught the attention of practitioners worldwide, with the court ruling that the arbitration clause contained in a bilateral investment treaty signed between EU countries would be incompatible with EU law.

Please join us for a discussion on the impact and consequences of the decision, as well as practical aspects and concerns that investors and lawyers should consider regarding current and future investments involving the EU. The discussion will include consideration of the fate of pending arbitrations, as well as a conversation on how protection might best be secured for new investments. The discussion will be followed by an Oxford-style debate, “Achmea Decision: Did the ECJ Get it Right?”

The speakers, Raquel Macedo, Dimitrios Papageorgiou, Elena-Mihaela Gheorghe, Marine Koenig, are part of a group of young practitioners from the 2018-2019 Young ICCA Mentoring programme, currently being mentored by Skadden partner Dr. Anke Sessler.

Please register by March 4th, 2019. Registration is free of charge and seating is limited. For questions, please contact at eventi@dejalex.com or +39 02 725541.

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The post ACHMEA CASE: PERSPECTIVES ON THE FUTURE OF INTRA-EU INVESTMENT DISPUTES – Milan, March 11th, 2019 appeared first on Studio Legale De Berti Jacchia Franchini Forlani.