Under the American federal Constitution, disputes may be litigated in either federal or state courts. Arbitration and mediation are also permitted.
Enterprise customers and service providers have substantial flexibility and legal autonomy in the selection of dispute resolution procedures. The following summary invites a further discussion with your outsourcing lawyer on risk allocation and risk management strategies and techniques generally, the structure of relationship governance, choice of law, choice of forum and contractual and non-contractual remedies for breach.
Relationship Governance. American laws permit parties to enter into agreements that require certain amicable dispute resolution procedures before escalating the dispute to a formal judicial or arbitral proceeding. In structuring “relationship governance,” however, care must be taken to avoid unduly prejudicing a party’s right to obtain effective enforcement of its contract. Accordingly, there is usually a balance favoring informal dispute resolution before litigation.
Contractual Choice of Law. Parties to an outsourcing contract, particularly if one party is not a U.S. person or U.S. entity, have some flexibility in selecting which law will govern their relationship. On one hand, American principles of “conflicts of law” generally adopt the principle that parties may not contractually choose the law of a jurisdiction that has no reasonable connection to a party or to the performance of the contract. On the other hand, certain states have special legislation that invite non-domiciliaries of that state (other Americans not from that state, or other foreigners) to choose local law to govern their contracts. New York permits such contractual choices of law for commercial disputes “arising out of a transaction covering in the aggregate note less than $250,000.” NY GOL 14-501. Florida adopts the same $250,000 minimum for choosing Florida law in a contract, but this is not permitted unless all the parties are U.S. citizens or residents or where the transaction does not bear a substantial or reasonable relation to Florida. Florida Stat. 685.101.
Contractual Choice of Forum; Jurisdiction over Foreigners with their Consent. Similarly, American general principles of “conflicts of law” prevent parties from agreeing to submit their dispute to a court in a jurisdiction that lacks a reasonable connection to the parties or the transaction. However, parties can do some “forum shopping.” Certain states permit the parties to choose to submit their disputes to local courts where there is no reasonable relation to that state. For example, New York permits the parties to sue a foreign (i.e., non-New York) corporation, non-resident, or foreign state where the lawsuit arises out of or relates to any contract for which the parties have agreed to choose New York law to govern the contract, provided (1) the contract involves consideration or obligations not less than $1,000,000 and (2) the defendant has agreed to submit to the jurisdiction of New York courts. NY GOL 14-502. Florida’s version is less inviting, allowing lawsuits against “foreign” persons or entities (residing or located outside Florida) only where (1) the parties have validly contractually adopted Florida law and (2) the defendant has agreed to submit to the jurisdiction of the courts of Florida. Florida Stat. 685.102.
Long-Arm Jurisdiction over “Foreigners” without their Consent. Foreign service providers need to be aware of the possibility that they could be sued in local U.S. courts for breach of contract or other harm to a local U.S. enterprise customer. Generally, a foreigner (i.e., non-domiciliary of a state) may be sued in local courts of a state under “long-arm” jurisdictional principles for claims of “breach of contract” or “civil responsibility” (if we speak in terms of “civil code” law) or “breach of contract” or “tort” (if we speak in terms of “common law”). There must be a sufficient jurisdictional connection to the court. For example, in New York, parties can sue “foreigners” for damages where the “foreigner”
(1) “transacts any business within the state or contracts anywhere to supply goods or services in the state”; or
(2) “commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act”; or
(3) “commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act, if he
(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or
(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce”; or
(4) “owns, uses or possesses any real property situated within the state.”
Differences of Competence of State and Federal Courts. Federal courts decide disputes pursuant to specific Constitutional or legislative authority. Otherwise, all disputes must be resolved by state courts. Federal courts have a jurisdictional threshold: the dispute must be at least $75,000. Federal courts are designed to protect “foreign” defendants from local prejudice, since if there is “diversity of citizenship” between the plaintiff and the defendant, the Federal court will adjudicate claims even if the claims are not based on a right or obligation of a federal statute or the Constitution.
Arbitration. The Federal Arbitration Act allows parties to arbitrate their disputes. Unless the parties have agreed otherwise, arbitration involves substantial administrative fees, a lack of discovery proceedings and other civil due process protections, and no meaningful judicial review of arbitrators’ decisions. This explains why there have been legislative and regulatory proposals to limit the use of arbitration in cases of unequal bargaining power, such as for employment disputes, consumer disputes and franchise disputes. Generally, corporate parties will not be able to invalidate their agreements to arbitrate. Interim protective measures are available in arbitration proceedings, but judicial intervention for “equitable remedies” (notably injunctions) may also be available if the parties have agreed to it. Enforcement of foreign arbitral awards is respected under the U.S. adhesion to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards (sometimes called the “New York Convention”). Accordingly, arbitration clauses are frequently used in international outsourcing transactions.