Have Your Cake and Eat It, Too: Underappreciated Benefits of International Arbitration

International arbitration offers the parties involved many obvious benefits, including the ability to select the law of the contract, to choose the number of arbitrators, to select ad hoc or administered arbitrations, to choose the language of the proceeding and to agree on the site for the arbitration.

There are, however, other less obvious and underappreciated benefits associated with international arbitration. One of these can be illustrated by reviewing the details of an arbitration in Johannesburg, South Africa, in which the author and John Mandler, chair of Faegre & Benson’s agribusiness practice, were privileged to represent a U.S. subsidiary of a German multinational corporation in an international arbitration. This hidden advantage was available to the company thanks to the thoughtful, long-range business perspective it brought to its dealings with customers and commercial suppliers.

The Onion and the Seed

In June 2003, the company, a seed-supply firm based in the western United States, received a shipment of onion seeds from one of its suppliers in South Africa. These seeds had been produced in that country after a two-year process of growth and cross-pollination, and were designed to produce a uniform, productive batch of seeds for a highly popular variety of onion known as the sweet onion hybrid. Consistent with its practices, the company kept a few batches of these seeds and shipped the balance to its international dealers and distributors, who in turn sold them worldwide to the ultimate end users, onion farmers.

Some time into the onion-growing season, the company started receiving complaints about the onions that sprang from these South African seeds. It appeared that instead of producing the hybrids—which are large, sweet and bulbous—the seeds were producing small, yellow, flat onions that would yield less and receive a lower price in the marketplace. Shortly after these discoveries, the onion farmers complained to the company about having been sold the wrong species of onions.

The Company Does the Right Thing

At this point, the company had to decide what to do about the wrong species of onions and what course of action it should take to resolve the difficult situation in which the onion farmers found themselves. The company’s first step was to contact its dealers and distributors and instruct them to stop selling the problem seeds.

Its next decision was ultimately what made possible the successful resolution of its supplier dispute: The company decided to face the seed crisis head on, to acknowledge its responsibilities to the onion farmers and to pay those who were harmed as a result of the company’s sale of the wrong seeds. At significant expense to the company, it settled all claims received from onion farmers worldwide, who had, through no fault of their own, planted the "bad" seeds.

Besides being fair and responsible, these actions proved to be wise from a business standpoint as well. The company was able to eliminate quickly its downside-liability risk and to maintain its excellent relationships with its worldwide dealer, distribution and customer networks. At that same time, the company laid the foundation for the eventual successful resolution of its future dispute with the seed supplier.

"Bad" Seed Investigation

When the complaints about the seeds first surfaced, the company concluded that the cause of the problem was most likely that the seeds had been mislabeled by its South African supplier. The company immediately began an in-depth investigation to confirm the cause of the problem. The company conducted sophisticated DNA testing of the seeds and grew test plots to confirm the problem. These tests revealed that, as suspected, the seeds received were not those of the sweet onion hybrid, nor were the bad seeds related to the seeds provided by the company to its South African supplier for cross pollination. In short, the evidence resulting from the company’s investigation provided proof that the supplier had mislabeled the seeds.

International Arbitration in South Africa

The company decided to move forward to recover its losses from the South African supplier. But in doing so, it also wanted to maintain its business relationship with the seed supplier, notwithstanding the supplier’s negligent mislabeling of the bad seeds. Additionally, since the South African company was modestly capitalized, the company realized that the seed supplier may not have had the financial wherewithal to survive protracted litigation of the issues. Because the company had a long and mutually beneficial relationship with this particular seed supplier, it wished to preserve the business relationship. The company asked Faegre & Benson’s agribusiness practice team for advice on how to achieve these goals.

The company, with assistance from Faegre & Benson’s experienced arbitration and agribusiness lawyers, made a claim in arbitration against the South African seed supplier. Under the seed-supply contract, the arbitration was held in South Africa under the rules of the International Seed Federation.

A successful result in international arbitration does not just happen. It requires an effective team of lawyers and clients—business people who know their industry, who are experts in their field, and who are intimately familiar with the facts of the case and experienced attorneys who can assist them.

The arbitration team worked to develop the evidence and provided the technical and legal expertise necessary to document and prove the claims for damages. The company’s prior decisions to treat its customers fairly and to apply its technological expertise to confirm the source of the mistake were key in this regard. By promptly settling the end users’ claims arising from the supplier’s negligence, the company limited both its exposure and the cost of litigation with the end users. It had already developed persuasive evidence that the South African supplier had made a significant mistake. The team was able to present the company’s case effectively to the arbitral panel in a week-long proceeding in South Africa. The company was successful in its arbitration effort and the arbitral tribunal issued an award to the company for damages, which were ultimately paid by the supplier’s insurer, a major London–based insurance underwriter.

This result achieved the company’s goals of recovering its damages while maintaining an ongoing relationship with a valued supplier. Not surprisingly, after the arbitral award was rendered, the representatives of the company and the seed supplier went off together on a weekend photo safari that marked a new beginning for their business relationship.

The company was able to minimize the harm from events that could have resulted in long-term damage to its business relationships with both customers and its suppliers. Instead, it protected its customer base and built a more effective supply chain.

The company effectively used international arbitration to resolve a dispute and make itself financially whole while at the same time continuing to maintain a mutually beneficial business relationship with the adverse party in the arbitration. As this experience suggests, the ability to preserve business relationships while resolving disputes with a contract party is one benefit of international arbitration that deserves a bit more recognition than it is normally given.