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How to write an arbitration clause for offshore outsourcing deals

Stephanie Overby | Sept. 13, 2016
To avoid litigation and headaches, in general, it’s imperative that you incorporate an effective arbitration clause into international outsourcing contracts.

No one likes to anticipate an outsourcing relationship going bad, but a certain number of them inevitably will. Ideally, the two parties are able to work through disagreements without resorting to legal remedies, but having a mechanism for resolving disputes short of litigation is critical — particularly when working with foreign IT services providers. That’s why incorporating an effective arbitration clause into international outsourcing contracts is critical.

“Being able to access the assets of a counter-party to satisfy a judgment or arbitration award is a critical factor in deciding what type of dispute resolution mechanism to include in a contract,” says Robert Kriss, partner in law firm Mayer Brown’s Washington D.C. office. “Most countries are not legally obligated to enforce a judgment issued by a U.S. court against assets located in their countries. However, most countries—including China, India and Mexico — are legally obligated to enforce arbitration awards (subject to limited exceptions).” Those countries and nearly 150 others signed the New York Convention for the Enforcement of Foreign Arbitral Awards. So when working with companies with most of their assets in one of the countries that signed that international treaty, an arbitration clause is necessary for meaningful dispute resolution.

Arbitration vs. litigation

Unlike litigation, arbitration also provides for neutrality--both in the place where the dispute is resolved and in the nationality of the decision maker, says Kriss, and arbitration proceedings are also more confidential than judicial proceedings.  While the prospect of public judicial proceedings can sometimes deter IT providers or give the customer settlement leverage, arbitration is generally a faster and less expensive alternative.

Not all arbitration clauses are created equal, however. Every international arbitration organization offers a standard clause IT service buyers can put into their contracts.  Such clauses typically state that all disputes arising under or in connection with the agreement shall be resolved by arbitration under the rules of a specific international arbitration organization. “While such a standard clause is enforceable, more is required to make the arbitration clause workable and to minimize disagreements at the time of arbitration,” says B. Ted Howes, partner and leader of Mayer Brown’s U.S. International Arbitration practice. “Also, because each contract is different, there are a number of optional provisions that parties should consider adding to an arbitration clause depending on the nature of the contract.”

Large, complex outsourcing deals may justify more robust arbitration process, says Brad Peterson, partner and co-leader of Mayer Brown’s Business & Technology Sourcing, while it might be more efficient to create a simpler arbitration approach with limited discovery for smaller contracts. “A particularly technical sourcing effort might call for a requirement that the auditor be skilled in the technical specialty,” Peterson adds.

 

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