The Midnight Clauses: Drafting the Dispute Resolution Clause; Courts vs. Arbitration

Dispute resolution clauses, although one of the most crucial clauses in any agreement, are usually left to be negotiated last minute and are therefore often called “midnight clauses”. The importance of a well drafted and well thought dispute resolution clause becomes crucial in any transaction or commercial relationship when parties are in dispute. It is therefore extremely important for parties to negotiate and agree on the law (and the seat if the parties agree to resolve their dispute by resorting to arbitration) that will govern their relationship and, on the means, to resolve their disputes.

With respect to the governing law, it is important to choose a law that is applicable where the parties may anticipate a judgment/ arbitration award will be enforced. Under Egyptian law, parties are free to choose the applicable law in arbitration proceedings seated in Egypt and this is applied in practice; however, in court proceedings, in practice, the Egyptian courts rarely apply foreign laws.

Although at the enforcement stage, in principle, the substance of the dispute will not be re-assessed, though, if certain principles of the governing law, on which the judgment/arbitration award being enforced relies on, are contrary to public order in the enforcement country, the enforcement will not be successful. In that respect, the Egyptian court recently confirmed that, a contradiction to public order principle is ground to invalidate the award.

The main pillar of a well-drafted dispute resolution clause is to clearly provide for a non-equivocal choice by the parties of (i) the governing law (ii) and the venue or fora which will hear any dispute in relation to the transaction.

With respect to the fora, the parties may choose either the courts of a specific country or arbitration. Practically, and recently, parties in cross border transactions often choose to resort to arbitration; however, arbitration may not always be the best option. This will very much depend on the nature of the dispute, the country of enforcement, and whether better routes are available in the courts of the jurisdiction of enforcement.

Arbitration proceedings has the undeniable advantage of giving the parties the possibility to choose a modern administration institution, the possibility to resort to expedite proceedings and address complex/multiparty disputes, and to choose experienced arbitrators with the relevant technical skills to address the relevant issues at stake. Arbitration also often gives comfort to the parties in cross-border transactions that the parties will be familiar with the procedures.

Further, confidentiality is also another advantage of arbitration proceedings.

Having said that, the main advantage of courts over arbitration in Egypt relate largely to costs as court proceedings are often substantially less expensive than arbitral proceeding and although international awards are enforceable in Egypt, there is always a risk that an award be set aside for contradicting the Egyptian public order. Nevertheless, one of the downsides of the courts route in Egypt, is the slow pace of the proceedings. Normally, a commercial case in Egypt could take years, until a final and binding decision is issued.

Importantly, if the jurisdiction of enforcement has in place efficient expedited proceedings for the recovery of a claims, the courts of such jurisdiction will therefore be more efficient than an arbitral tribunal.

In conclusion, the tips to consider when negotiating midnight clause are (i) whether you will be the party likely to initiate a claim or vice-versa ; (ii) the country where enforcement is sought and whether such country is favourable to arbitration; (iii) whether the country of enforcement has efficient expedited proceedings; (iv) the commercial nature of the agreement; and (v) the complexity of the dispute and whether the dispute relates to several related agreement/parties.

Parties should assess the agreement, consider which will better serve the dispute, and decide upon the fora. There is no “best” fora or all-purpose recommendation; the parties need to assess the agreement or the transaction before determining the best fora accordingly.

This article was first published in the first edition of Legal Industry Review (LIR) Egypt on page 24, April 2024.