Dispute resolution in Asian biotech joint ventures: things to consider
Agreeing to a dispute resolution mechanism in an international joint venture requires forward thinking, say Jens Petry and Tom Gassmann, Squire Patton Boggs.
Joint ventures with Asian partners in the life sciences industry are a highly sensitive and often challenging exercise for European and US corporations.
The protection of existing and future IP rights and know-how is a key factor. Comprehensive IP clauses are important for tackling this issue. Equally or even more important for a company is the question of how to ensure that the rights granted under IP clauses can be enforced efficiently. This article identifies common pitfalls and examines various alternatives for dispute resolution mechanisms.
Organisation of the joint venture
The primary focus of the contractual arrangements of a joint venture between Western companies and Asian partners usually lies in the general organisation of the joint venture. In addition, protecting their own investments and IP rights, either brought in or acquired through the joint venture, is key for both parties.
While the protection of existing IP and the distribution of new IP plays a significant role during the contract drafting phase, less emphasis is sometimes placed on an appropriate dispute resolution mechanism to ensure enforcement of existing or newly acquired IP rights. However, protection and enforceability are both equally important if the relationship goes south. Lacking the ability to enforce the rights under the joint venture agreement can have a huge impact on the economic value of the joint venture.
IP disputes can occur in various constellations. Many factors come into play, such as the nature of the IP right, whether it is registered or unregistered, sole or co-ownership, the remedies sought, ie, injunctive relief, disclosure of information, damages, or the need for ad hoc procedures. These manifold constellations require suitable conflict resolution clauses. There is no “one size fits all” solution.
In general, the specific details of the intended cooperation are an important aspect to determine the proper dispute resolution mechanism. Cultural differences have to be bridged as well as, for example, differing preferences for civil or common law principles. One would expect that both parties would usually agree that the dispute resolution mechanism should be solution-oriented and allow both parties to enforce their rights equally in a cost-efficient and timely manner if a dispute under the joint venture arises. But even this is not always the case.
The key factors that a company should consider when negotiating a suitable dispute resolution mechanism are outlined below.
Things to consider
Dispute resolution clauses should be tailored to the specific needs of the contracting parties for each contract, whereby each party must consider its respective priorities and how to best protect or enforce them in the case of a dispute. In this context, each party is well advised to take the following important points into account
Litigation versus arbitration
Presumably the most essential question is: Do you want to litigate or arbitrate?
There are many factors to consider before answering this question. The answer will also have significant consequences. It will impact the entire dispute resolution process. Litigation and arbitration are two different procedures for resolving disputes. Each type of procedure has its own advantages and disadvantages depending on its organization
1. Litigation
Litigation refers to the procedures at state courts with state authority. The procedural rules are determined by the law of the place of jurisdiction.
Proceedings are very comfortable and foreseeable for a party if the proceedings take place in the country where the party has its place of business.
However, it is common in international joint ventures for each party to avoid submitting to the state jurisdiction of the other party in order to prevent the other party from having an advantage in terms of knowledge. Exceptions may exist, but in most cases the parties will agree on neutral ground, which will then be challenging for both parties.
In many countries, the proceedings are perceived as lengthy and costly and involve judges, who lack the necessary technical education and knowledge to decide complex IP-related issues. Options for the parties to agree on the place of jurisdiction and on the applicable law exist but are often limited, which makes it difficult for the parties to find a suitable compromise.
Further complications arise if the applicable law is not the law of the place of jurisdiction because the expertise of judges in state courts is limited to the respective national law. For example, the place of jurisdiction may be in Switzerland, while the applicable law is Indian.
The public nature of proceedings in state courts is another factor to consider. In some jurisdictions, even written pleadings are made publicly available. Confidentiality can be achieved through specific court orders, but these are not always easy to obtain or may have a limited scope
2. Arbitration
In contrast, arbitration proceedings are only subject to limited control by the state courts. The proceedings are more flexible and give the parties more freedom to agree on the procedural rules and the organisation of the proceedings. Compared to litigation, arbitration is often perceived to be more efficient in terms of time and costs, especially in disputes involving complex technologies and high values in dispute.
Arbitration proceedings take place on the basis of the parties’ contractual agreement for dispute resolution, ie, the arbitration clause. The parties submit the dispute to the rules of an arbitration institution, eg, the International Chamber of Commerce (ICC), the Singapore International Arbitration Centre (SIAC) or the Hong Kong International Arbitration Centre (HKIAC).
The institution oversees the dispute and the institution’s arbitration rules apply. The arbitration clause normally includes the parties’ agreement on the language of the proceedings, the seat of arbitration and the number of arbitrators.
Typically, each side appoints one arbitrator. These party-nominated arbitrators then agree on a presiding arbitrator. The presiding arbitrator acts as primus inter pares. This procedure gives the parties the ability to choose arbitrators with the required technical, industrial and legal knowledge to decide the dispute. Some institutions, for example, the HKIAC, offer a special list of arbitrators for IP disputes.
The flexibility to agree on the procedural rules makes it easy for the parties to establish confidentiality measures to protect sensitive know-how or other business information, where necessary. This is of particular importance in many disputes in the life sciences industry.
Not all disputes concerning IP rights are arbitrable. The arbitrability depends on the jurisdiction and seat of arbitration as well as the law chosen in the arbitration clause. For instance, patents are granted by state authorities, which means that a decision on the granting or existence of a patent cannot be made in arbitration proceedings.
Due to the special nature of arbitration and the many unwritten “best practices”, a high degree of specialisation is required in order to conduct successful and efficient proceedings in the interests of the respective parties. In particular, Chinese arbitration law has many special features which also have an impact on enforcement.
Agreeing on the seat of arbitration is crucial. This is not only about good travel connections and suitable facilities for the hearing. Special attention must be paid to the fact that the procedural law of the country where the arbitration takes place will apply for all issues, which are not addressed in the applicable arbitration rules. This often becomes an issue if only one of the parties is used to common law jurisdiction
Place of jurisdiction or seat of arbitration
When the parties opt for litigation instead of arbitration, choosing the right place of jurisdiction is of equal importance because it determines the applicable procedural law.
One of the most common differences between procedural rules is whether they allow discovery, such as, for example, under US procedural law.
A party must carefully consider whether allowing discovery is beneficial or detrimental to its case. Additionally, the costs of discovery must be factored in. Another strategic consideration might be whether the other party holds assets in the country where the proceedings are to be held because this might simplify enforcement. Furthermore, there are immense differences in terms of the efficiency and length of court proceedings in various jurisdictions, which the parties should consider.
In arbitration proceedings, the parties must be aware of the fact that an arbitration award is considered to have been issued at the seat of arbitration. This might have an impact on the enforceability of the award. Not all countries enforce awards from every other country. India, for example, is sometimes restrictive in this regard.
1. Enforcement
Before starting any dispute in an international context, a party should make sure that the intended award is enforceable against the other party. Otherwise, there will be extremely limited reasons to invest time, effort, and money in acquiring the title.
The most significant difference between litigation and arbitration is enforcement and its procedure. In particular, international enforcement must be taken into account here since IP rights should usually be protected as far as possible globally, and the losing party may have assets in a country where the IP rights can be accessed more easily.
2. Litigation
If a state court issues a final judgement, it can initially be enforced in that country. However, if the judgement is to be declared enforceable in another country, a court in the country where enforcement is to take place must usually issue a declaration of enforceability. It is only after the so-called exequatur procedure takes place that the judgment can be enforced in the respective country.
However, if there is no bilateral agreement or mutual recognition of judgments, the foreign court does not have to enforce the judgement as is the case, for example, between China and Germany, or when the enforcement would be contrary to the ordre public, eg, US judgments awarding punitive damages in Germany.
3. Arbitration
If an arbitral tribunal issues a legally binding arbitration award, enforcement takes place differently. An arbitration award always requires an exequatur procedure regardless of the country in which it is to be enforced.
This is where the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards” (the “NYC”) of 10 June, 1958, comes into play. Contrary to what its name suggests, the NYC not only applies to the recognition and enforcement of foreign arbitration awards but also to the recognition of arbitration agreements (see Article II of the NYC).
The NYC currently has 172 member states January 2024, the significance of the NYC cannot be overstated. It ensures that participants from the member states can depend on similar procedures and requirements for exequatur proceedings in those states.
Although national case law of different states may lead to different degrees of arbitration friendliness, the fundamental concept of the procedures for recognition, enforceability, and revocation is largely comparable in the most important legal systems due to the requirements of the NYC. If a state is a member of the NYC, the requirements necessary for an arbitration award to be declared enforceable are predetermined.
These requirements include the formal requirements under Article IV of the NYC and the grounds for non-recognition under Article V of the NYC, such as an ineffective arbitration clause, lack of arbitrability of the matter, violation of the right to be heard, or violation of the ordre public.
Based on current case law, the court of recognition and declaration of enforceability does not review the arbitration award on its merits because there is no révision au fond. The arbitral tribunal is required to make a binding decision according to the parties’ agreement. Therefore, an error in the application of law cannot be used as a valid defence under Article 5 of the NYC.
Although it is a major exception, it is worth noting that not all states enforce arbitration awards from all other contracting states of the NYC. Special care must be taken, for example, if the claimant intends to enforce its award in countries like India, China, or Malaysia.
Summary
There are many strategic decisions for a party to make before it agrees to a dispute resolution mechanism in an agreement on an international joint venture. The consequences are immense. The party is well advised to thoroughly think through every step of a potential dispute in advance.
If the stakes are very high, the involved technology is complex, and high standards of confidentiality are required to protect a party’s know-how, arbitration will often be the preferred choice over litigation.
Special attention must be given to determining the place of jurisdiction or the seat of arbitration in order to avoid procedural pitfalls. In terms of enforcement, a judgment is adequate in particular if the enforcement is to take place within the area of the court’s jurisdiction.
If multiple countries are involved or it is difficult to anticipate where the title should be enforced, an arbitration award, which can be enforced under the NYC, might be more beneficial.
Jens Petry is a partner and Tom Gassmann is an associate at Squire Patton Boggs.
