Doing Business In The USA: Resolving Business Disputes In The U.S. Through Litigation And Alternative Dispute Resolution

Any successful business relationship depends on the cooperation of the parties to that relationship. One party’s compliance with its contractual obligations will provide the other party with the benefits of its contractual rights. Often, however, even with the best contract drafting, the most thorough negotiations and the very best of intentions, parties will enter into a business relationship with different expectations and different understandings of their respective rights and obligations. Other times, one party will be unable or unwilling to meet its contractual obligations or will believe that the other party has not lived up to its end of the bargain. The ideal mechanism for resolving such disputes is, of course, an amicable discussion and negotiation between the parties. However, when amicable dispute resolution is not possible, resort to third-party adjudication becomes necessary.

As in most other countries, the U.S. offers two primary business dispute resolution processes—the public court system, commonly known as litigation, and private alternative dispute resolution (ADR), which encompasses many non-litigation dispute resolution mechanisms, the most prominent being arbitration and mediation. In arbitration, the parties submit their dispute to one or more arbitrators who privately decide the issues in the case. Arbitration decisions are usually final and binding. Arbitration is essentially a creature of contract: if there is no agreement to arbitrate, the parties must, if they wish redress, bring legal action in the courts to enforce their rights. Mediation, where the parties engage a neutral mediator to help facilitate a settlement, is also a creature of contract. However, unlike arbitration, a mediation does not yield a binding decision.

For foreign companies doing business abroad, international commercial arbitration has become the preferred mode of dispute resolution. In addition to the general desirability of selecting a neutral adjudicator not directly associated with a particular party’s national courts, international arbitration has a compelling advantage over court proceedings in that a worldwide treaty regime (established mainly under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards) makes arbitration awards rendered in the U.S. or another member state enforceable in other member states. Many foreign businesses dealing in the U.S. favor arbitration in order to avoid what they perceive to be the disadvantage of certain features of the U.S. court system—most notably (as discussed in Section 3), liberal pre-trial discovery rules that provide a litigant access to the records of the foreign business and the oral testimony or its executives, and greater exposure to jury verdicts of substantial punitive (or non-compensatory), as well as compensatory damages.

The foreign business should note that the existence of an arbitration agreement does not eliminate the risk of being subject to litigation. For example, any business involved in the manufacture or distribution of a product used in the U.S. may face exposure to litigation, and liability for damages, in U.S. courts for non-contract claims based upon product defects (usually tort claims, such as negligence or strict liability) by an end-user of the product in the U.S.

Failure to respond to litigation or arbitration claims can have grave consequences. It may result in the entry of a default judgment that, at the very least, will needlessly complicate the foreign company’s ability to do business in the U.S. That is one reason why it is essential for the foreign business, upon receipt of any U.S. litigation or arbitration pleadings naming it as a party or recipient, to contact U.S. counsel immediately in order to take appropriate action. The sooner U.S. counsel is involved, the better it can protect the company.

The United States has three levels of government: (1) a federal or national level, the laws of which apply to all citizens of the U.S., regardless of the state in which they live, and to others, including non-citizens of the United States, whose acts or omissions are governed by federal law; (2) a state level, where the laws of any given state generally apply to the citizens of that state and those who do business in that state; and (3) a local level, which has its own rules and ordinances. The courts in the United States are generally divided along the same lines. There is one federal judicial system, which deals with (a) disputes between citizens of different states of the U.S. or countries, and (b) matters of national or federal importance; and there are 50 separate state judicial systems, each one of which handles the interpretation and enforcement of its own laws. While federal law may have a greater geographical reach and cover the entire nation, it only applies to a limited category of matters. On the other hand, while state laws generally apply only to that which occurs within state boundaries, state law generally covers all types of disputes, without limitation. The interplay between state and federal courts is a complex subject, and determining whether state or federal law will apply to any given dispute is often a difficult question.

The federal court system is three-tiered. The lowest tier is the district court, which serves as the trial court. There is at least one district court located in each of the 50 states. Larger states are divided into several districts. For example, New York is divided into the Northern, Southern, Eastern and Western Districts.

Parties can appeal decisions of the district courts to the U.S. Courts of Appeals, the second tier of the federal court system. The U.S. is divided into thirteen Courts of Appeals, called "circuits." Each district court in the U.S. is assigned to one of these circuits.

The U.S. Supreme Court is the top tier of the federal court system. Located in Washington, D.C., and comprised of judges who are appointed for life, the U.S. Supreme Court hears appeals from the U.S. Courts of Appeals, as well as appeals from the highest state courts in cases involving federal law.

Federal courts have the power to hear cases in two situations. First, they may hear cases involving actions arising under either federal statutes or the U.S. Constitution. Second, they may hear cases involving only state law, so long as they involve citizens of different states or countries and the amount in dispute is over $75,000. The U.S. Constitution prohibits federal courts from hearing other cases, which are the exclusive province of the state court systems.

Each of the 50 states, and the District of Columbia, maintains a system of courts independent of the other states and independent of the federal judicial system. Each state also maintains its own independent set of laws and regulations. State courts are empowered to hear virtually all civil cases including, for example, disputes involving contracts, property, torts (wrongful acts) and corporate matters.

As do the federal courts, the state courts usually employ a three-tiered system: a trial court, an appeals court, and a high court. Note, however, that the courts in different states are not uniformly identified. For example, the highest state court in California is called the Supreme Court, while in New York the highest state court is called the Court of Appeals.

It is important to understand that a party does not have an absolute right to choose the court in which to bring its lawsuit. The court in which a lawsuit is commenced must have the power (or "jurisdiction) over the parties (personal jurisdiction) and the issues (subject matter jurisdiction) in the case.

A foreign business is not shielded from the jurisdiction of the U.S. courts simply because the business is not physically located in the U.S. One or more federal or state courts may have jurisdiction over foreign persons and entities that are doing business in the U.S., and even minimal contact may confer personal jurisdiction over a foreign business. One of the first questions to be addressed by a U.S. lawyer when consulted by a foreign business that is sued or wishes to sue in a U.S. court is whether jurisdiction is proper in a particular court.

In order to avoid jurisdictional questions, the foreign business entering into a contract with a U.S. company should consider including in the contract both a "forum selection" and a "governing law" clause. A forum selection clause sets forth the forum (particular court or arbitral tribunal) by which contractual disputes will be resolved. A governing law clause sets the law that will apply to disputes that may arise from the transaction. If drafted properly, these clauses can reduce the cost of future litigation and eliminate some of the unpredictability of the litigation process.

It is difficult to describe a typical U.S. lawsuit because each court system in the U.S. has its own set of specific procedures. Nevertheless, the following section will explain the steps generally involved in most typical U.S. commercial lawsuits.

The first stage in the litigation process is the commencement of the lawsuit or "action." The party who begins the lawsuit is called the "plaintiff," and the party against whom the lawsuit is filed is called the "defendant."

2.1.1 Summons and Complaint. The plaintiff typically commences an action by delivering or "serving" a "summons" and a "complaint" on the defendant and filing these documents with the court according to the applicable local rules. (Some courts require the pleadings to be filed with the Court first and served later.) The complaint states the nature of the dispute, usually with minimal detail, by describing one or several "claims" or "causes of action" against the defendant, which are set forth in numbered paragraphs (or "allegations). The complaint also states the relief sought by the plaintiff. The summons advises the defendant that it must answer the complaint or take other legal action within a prescribed time period, typically 20 or 30 days. The summons and complaint, and all formal papers subsequently filed with the court are called the "pleadings."

2.1.2 Answer or Motion to Dismiss. The "answer" is the defendant’s response that admits, denies, or denies knowledge with respect to, each allegation in the complaint. The answer also sets forth any defenses that the defendant has to the plaintiff’s claims. In addition, if the defendant has any claims against the plaintiff regarding the issues raised in the complaint, the defendant must include these in its answer as "counterclaims."

If the defendant believes that it cannot answer or move to dismiss the action within the time period prescribed in the summons, it can request an extension of time from the opposing legal counsel in which to respond to the complaint. Such an extension is often granted.

If a defendant believes that, as a matter of law, under any view of the facts, it is not liable for the claims alleged in the complaint, it may make a formal application (or "motion) to the court requesting that the court dismiss the complaint and immediately end the lawsuit without proceeding any further. The motion may be made in lieu of an answer or, in some cases, after an answer has been served. The defendant may negotiate for additional time to make the motion, just as it may negotiate for additional time to answer. The defendant may base its motion on one or more of several grounds, including, for example, failure of the plaintiff to state a legal claim according to the applicable state or federal law, lack of jurisdiction, or the failure to comply with the applicable "statute of limitations" (that is, lack of timeliness of the complaint).

A statute of limitations is a fixed period of time within which a lawsuit must be commenced. There is a separate statute of limitations for each type of claim. Each state has its own statutes of limitations. The federal courts generally look to the state courts for applicable limitations. For example, the statute of limitations in New York for certain contract actions is six years, but only three years for certain negligence actions. An important initial determination that a U.S. attorney will make is whether a particular claim falls within the applicable statute of limitations.

If the court grants a defendant’s motion to dismiss the lawsuit, the plaintiff has three options. First, it can drop the litigation and retreat. Second, it can, in most cases, appeal to the appropriate court of appeals in the same manner as if a judge or jury had decided the case after a full trial. Third, it can attempt to re-draft the complaint and try again. In most states, and in most cases, if the trial court denies a defendant’s motion to dismiss, the case proceeds to the next two stages: discovery and trial.

2.1.3 Default Judgments. If the defendant fails to answer, moves to dismiss, or requests an extension of time in which to do either, the plaintiff may obtain a default judgment against the defendant. A default judgment is a serious matter because it can have the same final and binding effect as a decision on liability by a judge or jury. A defendant against which a default judgment is entered can make a motion to the court to cancel or "open" the default. The court will open the default if it believes that the defendant has (a) a reasonable excuse for the default, and (b) a meritorious defense to the action. In order to avoid a default judgment in the first instance, the party served with a summons and complaint should immediately contact its U.S. attorney. Otherwise, the plaintiff who obtains the default judgment may begin enforcement proceedings on the defendant’s assets to collect on the judgment.

2.2 The Discovery Stage. "Discovery" is a uniquely American process. It is the stage of a lawsuit where the parties attempt to gather as much information as possible about the other side’s case. The judge is not significantly involved in the discovery process, but he or she may be called upon to resolve disputes that arise between the parties’ lawyers regarding the permissible scope of discovery, privilege claims and protection of confidentiality.

The discovery stage serves at least two purposes. First, it allows the parties to obtain information for use at trial or for use in a motion to the court. Second, it allows both parties the opportunity to determine whether the other side has a strong case and, if so, whether it would be wise to settle.

The foreign business should be aware that the U.S. has the most liberal discovery procedures in the world. A party to a U.S. lawsuit can be required to produce not only information that is directly relevant to the claims at issue, but also information that may lead to the discovery of relevant information. As a result, the discovery process in the U.S. can be quite long, ranging anywhere from a few months in a simple case to several years in a complex case. Moreover, if both parties adopt aggressive postures during the discovery stage, even a relatively simple American lawsuit can become quite expensive. In order to avoid the costs of prolonged discovery, many lawsuits in the U.S. settle during the discovery stage.

The three main discovery devices are:

1. Document production,
2. Depositions, and
3. Written interrogatories.

2.2.1 Document Production. The parties may require each other to locate and provide to the other side copies of documents, both within the U.S. and abroad, that are relevant to the case or, as noted above, which may lead to the discovery of relevant evidence. In order to obtain the documents, the parties prepare a request that contains a list of categories of documents for review. This seemingly simple procedure can be quite burdensome in large or complex cases, where a business may be required to review and produce thousands and thousands of responsive documents that may be contained in its files.

2.2.2 Depositions. A deposition, also known as an examination before trial, is an oral interrogation of a party (or a nonparty) by the opposing party’s attorney that is taken under oath. During a deposition, the attorney for the person being deposed is present to make any appropriate objections to the questions. A court reporter asks the witness to swear to the truth of his or her testimony and then prepares a written word-for-word transcript of the deposition.

In addition to providing first-hand information about the other side’s case, the deposition can also be used (a) in lieu of live testimony at trial if the witness is unable to testify, and (b) to impeach the testimony of a witness at trial if such testimony is inconsistent with his or her deposition testimony. In other words, the prior inconsistent deposition testimony is "put" to the witness at trial, who, confronted with the inconsistency, must either concede or explain it. In the hands of a skilled trial lawyer, a prior inconsistent statement can expose and devastate a less than truthful witness.

In order to arrange a deposition, an attorney sends a notice of deposition to the party or his counsel indicating the time and place of the deposition. It is important to understand that the deposition process can be expensive and disruptive, especially when party witnesses are located outside the U.S. and must travel to the U.S. for the deposition. The deposition process can last several days each for the main witnesses.

2.2.3 Written Interrogatories. Like the deposition, the interrogatory is a device to extract information from a party. Interrogatories are written questions presented to a party requiring written responses. A party is bound by its responses to interrogatories. Interrogatories must be carefully drafted to obtain the specific information desired. If the party receiving the interrogatories believes that the questions are too broad, are harassing, or do not request appropriate information, it may object in writing. If the parties cannot settle the issue, the court will decide whether the party must answer the questions.

2.2.4 Motions. The discovery process can be very expensive and may be prolonged—and trial delayed—if the parties make motions to the court in order to resolve discovery disputes. It can sometimes take several months for a court to decide a discovery motion.

In addition, typically at the close of discovery, a party can make a motion for summary judgment, requesting that the court decide the case before trial on the basis of the evidence gathered in discovery and written submissions only. In order to obtain summary judgment, a party must prove that there are no disputed material facts—making further discovery unnecessary—and that it is entitled to an immediate decision as a matter of law. Since most American courts are overburdened with such motions, it often takes many months for a judge to rule.

If a case is not decided on summary judgment, and does not settle during discovery, the court sets a date for the trial.

In the U.S., a defendant in almost any type of civil case has the right to demand a jury trial. In a jury trial, the judge determines what evidence the jury may consider and instructs the jurors on the applicable law. The jurors then make the ultimate findings of fact on the issues of both liability and damages.

It is important to understand that the members of a jury typically have no legal training and usually have only limited business or specialized knowledge.

Parties may waive a jury trial and allow a judge, who is usually more knowledgeable about business practices and issues, to hear and decide the case. Deciding whether to forego the right to a jury trial is often one of the most critical decisions that the American lawyer and their client will make.

At the outset of the trial, the attorneys make "opening statements" in which they inform the judge or jurors of what they intend to prove during the trial. The plaintiff then presents its witnesses and documentary and other evidence, after which the defendant is given the opportunity to cross-examine the plaintiff’s witnesses.

After the plaintiff concludes its case, the defendant may make a motion to the court for a directed verdict. In this motion, the defendant asks the court to decide the case in its favor on the ground that the jury could not reasonably return a verdict for the plaintiff based on the facts and the applicable law. Essentially, the defendant asks the Court to take the case away from the jury on the ground that it would be irrational for the jury to come to any other conclusion but a verdict for the defense. If the court denies the motion for directed verdict, the defendant presents its witnesses and evidence, and the plaintiff has the opportunity to cross-examine defendant’s witnesses. The parties then present their closing arguments, summarizing the proofs elicited at trial.

In a jury trial, after the closing arguments, both sides may make a motion to the court for a directed verdict. If the court grants this motion, the case will not go to the jury. If the judge denies this motion, the judge will instruct the jury on the applicable law, after which the jurors will be escorted to a private room where they will deliberate until they reach a decision (or "verdict). After the jury returns to the courtroom and announces its verdict to the judge and the attorneys, the losing side may make a motion for judgment notwithstanding the verdict. This motion asks the court to disregard the jury’s verdict as against the weight of the evidence and to decide the case in favor of the losing party.

A trial may last anywhere from several days to several weeks. During the trial, it is important for a representative from each party in the matter to be present, whether the case is tried before a judge or jury. It is also important to understand that a case is not necessarily over at the end of a trial; the losing party has the right to appeal the decision.

The party who appeals is called the appellant, and the opposing party is called the appellee or respondent. The appellate court in most cases is limited to a review of the law applied in the case and usually will not reconsider the facts determined by the judge or jury.

On appeal, the parties must submit a written brief explaining the parties’ arguments with respect to the evidence and the law, a full transcript of the trial, and all of the documentary and other physical evidence submitted at trial. In addition, the parties usually have the opportunity to present a short oral argument to the appellate court.

The appellate court may affirm, modify or reverse the trial court decision. In addition, the appellate court can send the case back to the trial court for a new trial on certain issues. The appeals process can take up to a year or more. If the unsuccessful party seeks to appeal to the highest court in a particular system, the appeals process will be further prolonged.

Even after a party obtains a final money judgment, it may still have to take further legal action to recover any money. The judgment is simply a document stating that one party owes another a certain sum of money. If the losing party does not pay voluntarily, the successful party must commence separate legal proceedings to enforce the judgment and collect the money.

Litigation in the U.S. is expensive. What makes this fact all the more important is that, except in certain limited situations, courts in the U.S. do not award attorneys’ fees or costs to the prevailing party in a lawsuit. Because an American lawsuit involving a foreign party will likely last many months and often more than a year or two, the foreign party must be prepared to incur significant legal fees and other legal expense (expert fees, jury consultants, etc.) in bringing or defending an action in the U.S. These fees and costs often play a significant role in the decision whether to sue, whether to settle, and the nature and timing of the settlement discussions.

It is common practice for U.S. litigators to provide their clients with litigation budgets. The foreign business should not be shy about requesting a budget and monitoring adherence to that budget. Of course, litigations are by nature unpredictable, and many costs depend on the actions taken by the other side, but it is not unreasonable to demand an explanation of the likely litigation stages and events; a proposed strategy for each such stage and event; and an estimated budget for each such stage and event.

In arbitration, the parties present their cases before a neutral arbitrator or panel of arbitrators who render a final and binding award. As previously discussed, international commercial arbitration has become the accepted method of resolving disputes among parties from different countries. The arbitration clause has therefore become a standard item of contract negotiation. Careful drafting of the arbitration clause is crucial, because inartfully worded provisions will invite the very court proceedings that the parties intended to avoid. Consultation with legal counsel is a must to ensure a fully effective arbitration agreement.

In drafting the arbitration clause, the parties should decide whether to submit disputes to institutional arbitration or ad hoc arbitration. Institutional arbitration is usually conducted by an organization (or administrative agency) with its own established set of procedural rules. The American Arbitration Association (AAA) and the International Chamber of Commerce (ICC) are two well-known examples. Ad hoc arbitration is not administered by an outside organization; rather, the parties themselves decide what procedures will govern their dispute. They may choose either to develop their own rules or to adopt rules especially designed for non-administered arbitration, such as the UNCITRAL Arbitration Rules issued by the United Nations Commission on International Trade Law.

Other issues that parties should consider in drafting an arbitration clause include:

• Description of arbitrable issues. Most arbitration agreements contain so-called "broad" clauses providing for arbitration of any dispute arising out of or relating to or in connection with the contract. If an arbitration clause is not drafted broadly enough (and sometimes the parties will not want a broad arbitration clause), the parties can end up litigating in U.S. courts the very question of whether a particular dispute is arbitrable.

• Locale of arbitration. For purposes of enforcing an arbitral award, selection of a locale in a country that has ratified an applicable multilateral treaty on award enforcement, such as the 1958 United Nations convention on the subject, is very important.

• Governing law provision. The contract should clearly provide for governing law. Contracting parties involved in the sale of goods should be aware that the Convention on the International Sale of Goods (CISG) is automatically applicable to international sale of goods contracts among nationals of member countries, unless the parties expressly exclude the CISG’s application.

• Number of arbitrators. Most arbitral tribunals consist of a sole arbitrator or a three-member panel.

• Procedures for appointment of arbitrators. The parties may choose, in the case of three-member panels, to have each side select its own party arbitrator or have an administrative agency or appointing authority make all arbitrator designations. Usually, the party-nominated arbitrators will jointly select a third, neutral arbitrator.

• Arbitrator qualifications. The parties may want to insert particular qualifications in order to ensure that only arbitrators knowledgeable about the subject matter of the contract are considered for selection.

• Interim measures of protection. In the U.S., parties to arbitration agreements are generally permitted to obtain provisional remedies in the courts in aid of arbitration, such as injunctive relief and pre-award attachment of property. The need for such extraordinary relief must be carefully established, since the courts will view their interjection into the arbitral process as somewhat intrusive. However, several U.S. courts have held that the 1958 United Nations convention on enforcement of awards precludes resort to the courts for such provisional relief.

• Language of the arbitration. English will usually be either the sole or an alternate language for international arbitrations.

• Applicable time limits. The parties may specify time limits for various stages of the arbitration proceeding so that the award will be rendered within a fixed and reasonable time frame.

• How arbitration costs are to be borne. Arbitration costs include arbitrator compensation, administrative agency fees and attorneys’ fees. Generally, arbitrators have the discretion to split such costs equally or to require one party to bear some or all of the other party’s costs, depending on the strength of the respective cases. It is not at all unusual for an arbitrator to require a losing party in an arbitration to reimburse the winner for legal expenses where the loser’s case was demonstrably poor and where the contract does not require each party to bear its own legal expenses.

• Payment of interest. The arbitrator generally has discretion to award pre-award or post-award interest, or both.

• Currency in which award is to be paid. Although institutional rules fill many procedural gaps, it is important to note that they are often silent on issues such as interest and currency. In an era of fluctuating interest rates and floating currencies, specific treatment of both in the arbitration agreement may be advisable in appropriate situations. The currency issue is of special interest in the U.S., since a U.S. federal court in New York recently ordered entry of judgment in a foreign currency for the first time (in a case in which TRP was counsel).

• Limitation of remedies. Many arbitration agreements now provide for the exclusion of punitive and consequential damages.

• Reasoned awards. U.S. law allows for the enforcement of unreasoned awards (no explanation or analysis) unless the parties agree otherwise.

• Award enforcement provision. The arbitration agreement typically provides that an award may be enforced by any court having jurisdiction.

If established procedural rules (such as those of the AAA, the ICC or UNCITRAL) are selected to govern the arbitration proceedings, many of the matters listed above need not be specified in the arbitration agreement. The main advantage of selecting a particular set of rules is that such rules provide procedures for facilitating arbitration proceedings in the absence of explicit directions by the parties. The need to resort to court intervention to fill gaps in the parties’ arbitration agreement is thereby avoided. The parties’ choice of an arbitral institution to administer a set of rules further lessens the likelihood of court intervention to enforce the rules. The price of this guidance, of course, is the fee charged by the administrator.

Generally, the less detailed an arbitration clause, the more discretion is accorded to the arbitrator and the administrative agency. Accordingly, the parties should specify their own procedures with respect to issues that they do not want to reserve to an arbitrator or to administrative agency discretion. Parties who desire an ad hoc arbitration assume a greater risk of litigation to resolve disputes over procedures for which they have not provided, or to enforce procedures upon which they have agreed. Arbitration agreements for ad hoc arbitrations, thus, have to provide for more contingencies than those for administered arbitrations. The UNCITRAL Rules, which specify procedural rules, but do not require an administrative agency to implement them, provide an intermediate option.

The arbitration framework is flexible and can be suited to the parties’ particular needs. The typical arbitration commences with the claimant’s filing of a demand, which can be as concise as a one-page summary or as detailed as a multi-volume statement of claims, replete with supporting exhibits. Either way, this demand, or request for arbitration, sets forth the claims. The respondent has the opportunity to file an answer and any counterclaims. A panel of arbitrators to hear the claims is selected, and one or more pre-hearing conferences with the panel may be held to schedule the exchange of information, filing of briefs and witness statements, and hearing dates. After the close of hearings, which usually feature the presentation of oral testimony, the panel will issue a final award deciding the claims in dispute.

When compared with U.S. court proceedings, arbitration has several features that are attractive to most foreign businesses. First, U.S. discovery rules are usually not applicable to arbitration proceedings. Pre-hearing document exchange is limited to information directly relevant to the claims, and depositions (oral examinations) of the parties are often not allowed (although certain third-party discovery may be permitted). Second, the panel of arbitrators is usually more familiar with the subject matter of the dispute than a jury or a judge. Third, arbitrators are less likely than juries to award unreasonably large damages. Fourth, panels (especially in international arbitrations) will often award to the prevailing party its arbitration costs. The foreign business should note that arbitrations taking place in the U.S. are becoming increasingly burdened (or, depending on one’s perspective, blessed) with procedures more traditionally associated with litigation than arbitration. The foreign business may wish its U.S. counsel to address this matter in the contractual arbitration provisions.

In mediation, a neutral third party helps the disputing parties to fashion their own settlement, or offers its own proposal to them. Mediation is intended to encourage the parties to explore their dispute resolution options and fully disclose their concerns and positions to the mediator. The mediator provides an open, informal and non-confrontational forum within which to settle disputes. A mediation proposal, however, is not binding upon the parties. Therefore, if the parties agree to mediation, they must also provide for arbitration in case mediation does not work. Otherwise they face the prospect of court proceedings to achieve a binding result.

U.S. court judgments and arbitration awards are not self-executing. If the party (or judgment debtor) against whom money damages or other relief is granted refuses to comply with the judgment, then the prevailing party (or judgment creditor) will have to take further legal action to collect or "execute upon" the judgment. The U.S. judicial system provides procedures for enforcement of judgments and awards which may be used to create effective pressure leading to eventual payment. Sometimes, however, a judgment debtor will be judgment-proof, that is, without sufficient (or any) assets to collect. Negotiating payment provisions in the initial contract, such as letter of credit arrangements, can therefore be vital in reducing, if not eliminating, the time and cost of potentially futile enforcement efforts.

Under U.S. law, a court judgment entered by the court of one U.S. state is entitled to full faith and credit in all other U.S. states. This means that the property of a judgment debtor anywhere in the U.S. is subject to execution. Also, the full faith and credit principle equally applies to default judgments so long as the court in which judgment was entered had jurisdiction over the judgment debtor.

Once a judgment is entered, it becomes an enforceable lien against the debtor’s property for the life of the judgment (which may be up to 20 years). After entry of judgment, a variety of supplemental proceedings become available to the judgment creditor. Principal among these devices is the restraining notice. Any party served with such a notice, which has property of the judgment debtor in its possession, cannot dispose of or transfer that property. In this manner, assets in the possession of the debtor or third parties (garnishees) may be frozen so that the prevailing party may ultimately collect them. Another major tool is disclosure in aid of enforcement. The judgment creditor can issue subpoenas requiring the debtor and third parties to give testimony under oath and provide books and records as to the whereabouts of property that could satisfy the judgment. The failure of a foreign business to comply with a restraining notice or a subpoena may result in court sanctions against it.

The foreign business should also note that a judgment entered in courts outside the U.S. may be enforced in the U.S. to the same extent as a U.S. judgment. If a debtor’s property is located in a U.S. state, the foreign judgment creditor can bring a court action to recognize the foreign judgment (even if it is a default judgment). If the U.S. court is satisfied that the debtor received due process in the foreign proceedings (the requirements vary from state to state), the creditor can record the foreign judgment as a U.S. court judgment. Once so recognized, the foreign judgment creditor can avail itself of the same enforcement remedies afforded to the U.S. creditor. Moreover, many states (New York, for example) allow a judgment creditor to "attach" a foreign judgment debtor’s in-state assets pending disposition of the court action to recognize the foreign judgment.

U.S. procedures for the enforcement of an arbitration award are, overall, more favorable to the judgment creditor than those for a court judgment. Awards rendered both in the U.S. and abroad (in the territory of a country that is a party to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the similar 1975 Inter-American Convention) can be recognized or confirmed by an appropriate U.S. court. The defenses to confirmation are very limited, and U.S. courts with few exceptions extend recognition to arbitral awards. Once confirmed, the award is entitled to the identical full faith and credit treatment as a court judgment for purposes of enforcement.

Special rules apply to the enforcement of judgments against state-owned foreign entities. Under the U.S. Foreign Sovereign Immunities Act of 1976 (FSIA), such foreign entities may be accorded immunity from suit. However, the FSIA provides that no immunity from suit or from execution upon a court judgment will be granted if, among other things, the foreign entity engages in certain commercial activities involving the U.S. or waives its immunity. Moreover, under the FSIA, arbitration agreements constitute waivers of sovereign immunity for the purposes of judicial enforcement of both the arbitration agreement and the arbitral award.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.