Losing sleep over the Midnight Clause: Drafting disputes provisions for cross-border technology agreements and foreign investments

Cross-border technology disputes are on the rise under a wide range of agreements, including licenses and development agreements, long term IT or technical service agreements, joint ventures, and other collaboration and implementation agreements to develop new technologies. These disputes typically are high value, and often involve trade secrets or other forms of proprietary information and intellectual property. Depending on the technology involved, they can also require fact intensive inquiries about compliance issues on both sides.

When parties are negotiating a deal, they often are optimistic about the relationship and focused on collaborating. While dispute clauses might not seem important at that time, those clauses are often the first clause a litigator looks at when a dispute arises. They are critical for international disputes where the contracting parties are from different jurisdictions. In fact, when triggered, the dispute clause determines which jurisdiction will resolve the dispute, whether that resolution will involve litigation, mediation, arbitration, or some combination of the three, and which national law will govern the proceedings.

As part of California International Arbitration Week, Silicon Valley Arbitration and Mediation Center and White & Case are gathering a stable of leading international arbitration practitioners and arbitrators to discuss how advanced planning can help avoid pitfalls when a technology dispute arises.

In this article, we kick off the discussion by examining why technology disputes arise and how to mitigate them, and why arbitration may be the best forum to resolve those disputes (or, for Churchill, the worst forum except for all the others). We also share some key points for drafting arbitration clauses, and we explain how technology companies investing abroad can structure their investment in advance to ensure treaty protection against certain foreign governmental conduct that unlawfully and adversely interferes with their investment.

Why Do Technology Disputes Arise?

While no two disputes are the same, some themes repeatedly come up in technology disputes. Most commonly, disputes arise because of:

A lack of clarity as to the roles of each party and the allocation of risks;

• A lack of transparency, particularly where a party suspects another is failing to perform or underpaying royalties;

Unrealistic expectations that cause the parties' commercial interests to diverge over time, including for example:

o Unrealistic implementation timetables; and

o Unrealistic internal expectations about cost savings or profits that make the deal more marginal that anticipated; and

Unauthorized use of one party's proprietary information (trade secrets, know-how, IP etc.)

How Can Parties Minimize the Risk of Disputes?

The good news is that technology companies can proactively avoid at least some disputes with careful contract drafting. We note a few tips for drafting contracts below.

First, be realistic about the resources needed to implement the agreement. Most technology contracts require dedicated resources for ongoing monitoring and compliance.

Second, limit "agreements to agree." Leaving issues open might seem tempting in the thick of negotiations to move things along at the beginning of the deal when both parties are optimistic and working toward a common goal. But down the line, if there is a dispute, the relationship likely has dissolved. Resolving open issues upfront reduces the risk of having a dispute about them later.

Third, draft the agreement to include realistic project milestones with clear consequences for failure to perform, which is a great way to ensure that both sides have the same expectations upfront.

Fourth, include a clear and well thought-out dispute resolution clause in the agreement. Dispute clauses are a great way to support longer-term commercial relationships that both parties typically seek when they enter into a technology agreement.

Why Arbitration May Be the Best Forum to Resolve Cross-Border Technology Disputes

When negotiating dispute clauses, companies should generally insist on arbitration, as opposed to litigation, in just about any cross-border deal and in just about any deal that involves highly technical products where either proprietary information is involved or where specialized technological skills are required to understand them.

The key advantages of arbitration are particularly adapted to those disputes for several reasons.

First, when parties appoint an arbitral tribunal or choose an institution to make that appointment, they have autonomy in the decision-making process and can ensure that it is neutral and non-partisan, leveling the playing field. That would not be the case if one party were forced to litigate in the domestic courts of the other party, especially if that party is a State-owned entity.

Second, parties can agree to make their arbitration entirely confidential, which is generally of critical importance in disputes involving secret and sensitive information. By contrast, in some domestic court proceedings, including in the United States, the full record of the case may be published online with limited redactions and easily accessible to non-parties.

Third, as it is entirely a creature of contract, arbitration offers parties the ability to devise a bespoke procedure, most adequate to their specific dispute. This of course starts with the parties' ability to appoint their arbitrator and/or to agree to any requirements for expertise and nationality that any prospective arbitrator must have. For example, in highly specialized industries, parties often agree in their dispute clauses that each member of the arbitral tribunal, including the arbitrator appointed by the other side and the presiding arbitrator, must be a lawyer with a certain number of years of experience in that industry or in disputes related to that industry.

Fourth, arbitration results in a final and binding award. Thus, arbitration awards are generally not subject to appeal and can only be vacated, i.e. annulled, for extremely limited reasons.

Most importantly, unlike US court judgments, arbitral awards are enforceable in nearly every country in the world. That is because under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, each of the 160 signatories, including the United States, has agreed to enforce foreign arbitral awards except under very narrow circumstances, which the debtor has the burden of proving. This means there is nearly automatic recognition and enforcement of arbitral awards. The United States is not a party to any similar convention for the foreign recognition of US judgments, except for the 2019 Hague Judgments Convention on the Recognition and Enforcement of Foreign Judgments, which has few signatories and has yet to enter into force.

Drafting Effective Arbitration Clauses in Cross-Border Technology Agreements

We briefly outline the basic building blocks of an arbitration agreement, the "must haves," before discussing the "should haves" for an arbitration agreement in a cross-border technology contract.

Must Haves:

Keep it clear and simple. To mitigate any jurisdictional dispute, the parties should clearly state their intent to arbitrate in binding terms and should precisely define the scope of their arbitration agreement. In general, use broad terms to signal that "any controversy or claim arising out of relating to this contract, or the breach thereof, shall be subject to arbitration." If a specific issue is not arbitrable or should be resolved in another forum, clearly carve it out from the arbitration agreement and specify the forum for resolving it.

Specify the arbitral rules and/or the arbitral institution that will support the process, the number of arbitrators, which is typically one or three, and how those arbitrators will be selected.

Pick the seat or place of the arbitration. The seat is the country whose arbitration law will govern the arbitration, including in what limited circumstances a court can intervene in support of the arbitration, whether interim measures are available, and the grounds for challenging the award. It is important to choose a seat with a well-developed arbitration law and jurisprudence, where courts have consistently enforced a pro arbitration policy and have intervened as little as possible in the arbitration process.

Choose the language of the arbitration, as cross-border transactions may involve more than one language. If the evidence will likely be in multiple languages, consider whether documents must be translated to the language of the arbitration, which can be costly especially where technical documents are involved, or whether the originals may be submitted without translation.

Should Haves:

Many complex and long-term agreements include multi-step, or escalation, clauses, and require pre-arbitration negotiations before an arbitration commences. Mediation also can be used to seek an amicable resolution, although requiring mediation before arbitration can start may result in wasted costs on a futile or counterproductive process.

In certain circumstances, adding accelerated or specific procedures for narrow or technical issues (akin to dispute boards in construction disputes) may allow the parties to continue collaborating - not every dispute has to blow up the entire commercial relationship.

Indicate whether the arbitrators must have specific qualifications and experience. Agreeing on arbitrator qualifications and experience can help to ensure a rational and predictable decision-making for disputes involving complex industry customs or technological issues and may also make the process more efficient and less costly. In highly specialized fields, however, imposing criteria that are too stringent may make the pool of available candidates overly narrow and has even led some courts to find that the arbitration agreement was unenforceable.

For highly technical disputes, consider selecting experts that both parties agree should provide independent evidence to the tribunal if a dispute arises. Arbitration provides flexibility on the submission of expert evidence, and agreeing in advance on neutral experts may narrow the scope of the dispute and save time and money.

As many technology transactions and disputes involve multiple parties under multiple contracts, including different agreements for various developers, sub-developers, or suppliers, the arbitration agreement may need to address consolidation or joinder of third parties in any potential dispute.

Structuring Technology Investments to Benefit from Investment Treaty Protection

Many technology companies are not only engaged in cross-border commercial transactions with other companies, but are investing in new and existing technologies across the globe. These companies may end up in disputes with foreign governments that try to take their investments or curtail their profitability by imposing new onerous regulations.

For these companies, investment treaty arbitration may be the only option to avoid litigating against the foreign government in its own domestic courts.

Thousands of investment treaties are currently in force. These treaties extend protection to covered foreign investors that have made protected categories of investment. The State parties to these treaties typically undertake obligations not to expropriate a protected investor's investments without fair and adequate compensation, to treat those investors and their investments fairly and equitably, and to treat them no worse than local investors or investors from third States.

The State parties also agree in these treaties that covered investors may submit claims for breach of these undertakings to international arbitration. The investor accordingly benefits from a right of action where local remedies are inadequate, a neutral forum to resolve its dispute with the host State, and enforcement of the award under an international convention.

Technology companies can benefit indirectly from investment treaty protections, even if they are nationals of a State that has not concluded a treaty with the host State. Most investment treaties define protected investments as including shares in a company, including minority and indirect shareholdings. For an investment structured through a chain of companies in different States, each company in the chain accordingly may be a protected investor if there is an applicable investment treaty. Technology companies therefore may plan strategically to ensure that they benefit from treaty protection by structuring their investments through a subsidiary in a State that has concluded a treaty with the host State.

As with contract drafting, it is imperative to do this strategic planning before a dispute arises. Once problems begin to emerge, it is too late to restructure to gain treaty protection as the tribunal will reject any claim based on an investment made after the State had already begun taking adverse action against it.

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To learn more about drafting effective dispute clauses and structuring investments in cross-border technology transactions, join Silicon Valley Arbitration & Mediation Center and White & Case on March 15 at 10:40 a.m. Pacific. The event will feature a panel of leading practitioners and arbitrators, including Brody K. Greenwald (International Arbitration Partner at White & Case LLP), Sarah Reynolds (Managing Partner at Goldman Ismail and CEO at SVAMC) Yasmine Lahlou, International Arbitration Partner at Chaffetz Lindsey), Independent Arbitrator Amb. (r.) David Huebner and Independent Arbitrator Barbara Reeves.

The event is taking place in the Los Angeles office of White & Case LLP, and online as part of the second annual California International Arbitration Week from March 13-17, 2023. To view the March 15 panel or the entire week long CIAW agenda and to register, at no cost, search for "California International Arbitration Week" in any search engine or go to: ​https://lnkd.in/gnvj3AC9#CIAW2023. You can attend either in person in Los Angeles or virtually.

In addition, before the week of CIAW, the Daily Journal is holding a Webinar, California International Arbitration: Coming of Age, on March 8 at noon, to expand your knowledge of the area which should be known by all California practitioners. You can register for the Webinar by searching for www.dailyjournal.com or at

https://us06web.zoom.us/webinar/register/WN_nFl_ZyDGR4CIlMeXThqOBw.