The case of the Argentinean ship

Earlier this month, the Argentine naval sail training vessel "ARA Libertad" was arrested in the Ghanaian port of Tema following an injunction and interim preservation order granted by the Ghanaian court in Accra. The applicant was NML Capital Limited ("NML Capital"), a Cayman company which is an affiliate of the US hedge fund Elliott Capital Management ("Elliott").

The order was granted on the basis of judgments obtained by NML Capital in both the US and UK courts regarding bonds purchased by NML Capital, via Elliott, at roughly half their face value following Argentina's default in 2002 (considered to be the largest bond default in history). NML Capital did not participate in the 2010 restructuring by Argentina whereby bondholders were offered 30 cents in the dollar, and instead chose to hold out and pursue the state through the courts for the full amount due under the bonds.

NML Capital successfully obtained summary judgment in its favour for the principal and interest due under the bonds in the Southern District of New York on the basis that the bonds were expressly governed by New York law. The company then sought recognition of this judgment in the UK courts and in July 2011 the House of Lords (by majority) agreed that the Argentine defence of state immunity was not valid in the circumstances and that recognition should be allowed.

It was on this basis that NML Capital applied to the Ghanaian court to arrest the Libertad whilst docked at Tema during its graduation tour. Argentina unsuccessfully challenged the arrest, the Ghanaian court dismissing their appeal on the grounds of sovereign immunity, and holding that the detention was legal.

How do enforcement issues arise in practice?

When a party to litigation or arbitration obtains a judgment or award in its favour, if the losing party does not comply with the judgment or award (for example, by paying the debt due), the next step to consider is how to go about enforcing it.

With state court litigation, particularly in purely domestic disputes, the assets of the losing party are quite likely to be located within the same country as the court, since this is often the country of that party's residence or principal place of business. Conversely, with international arbitration the contrary is likely to be the case as the country where the arbitration has taken place is usually chosen for its neutrality. In this latter scenario the defendant is less likely to have assets of any value (if any assets at all) in that jurisdiction. International enforcement then becomes very relevant.

A legal tool available to creditors who are afraid that their debtors will take steps to try to avoid their assets being seized is the world wide freezing order, which operates to prevent a party from dissipating their assets, wherever located, in advance of the substance of the dispute being decided.  These freezing orders originated in the English courts, but are now sometimes granted by other common law courts, e.g. the British Virgin Islands. In order to obtain such an order, it is necessary to demonstrate to the court that there is a real risk that any judgment will go unsatisfied or that the defendant's assets will be otherwise dissipated.

Sometimes, there is no need to involve a court; for example, where a party to a contract has a charge or other proprietary security over a specific asset, such as a mortgage. When there is a default under that contract, the holder of the charge or mortgage may choose to enforce their rights of security directly if the whereabouts of the relevant asset can be readily ascertained. Real estate and moveable assets such as plant and equipment, vehicles and aircraft are all common targets for this kind of enforcement.

Is it possible to avoid enforcement?

Enforcement carries with it its own challenges and associated legal costs which can vary considerably from jurisdiction to jurisdiction. A defaulting debtor may think he can sit back and let the creditor come and find him.  Where the debtor is a (not very sophisticated or well-advised) state, it may be particularly inclined to take this view. In practice, this is usually a dangerous strategy to adopt unless the debtor has very close control over all its assets and receivables, and none of them outside his own country.  Along with the measures described above, the English and other common law courts have well developed procedures for examining debtors as to the location of their assets, and non-compliance with such procedures will amount to a contempt of court.

Comment

It is hard to avoid enforcement without the evasive efforts being disruptive to business and therefore to commercial sense. It is rarely practical to allow general business management (let alone the government of a nation) to be dictated by potential enforcement considerations.

The Argentine case detailed above is not particularly novel as a matter of law.  International law firms will be quite used to assisting clients handle this kind of situation. However, NML Capital's success in arresting the Libertad does provide an vivid example of: how wide the net of enforcement can be cast, the type of asset that is subject to seizure, and the fact that states and their assets are not immune from such efforts. Argentina does not have a healthy track record of complying with international arbitration awards and other liabilities following its financial crisis in 2001, and Ghana is not the first jurisdiction to which it has been chased by NML Capital, nor can it be presumed to be the last. It is likely that Occidental will soon be looking for similar ways to enforce its recent $1.77 billion damages award against Ecuador, if payment is not made quite soon.

The Libertad case is also a reminder to consider the benefits of making major commercial contracts subject to international arbitration clauses, rather than opting for traditional litigation, due to the greater enforceability of such awards in light of the large number countries that are a party to the New York Convention (NML's task would have been easier if the bonds it bought had contained arbitration clauses). This consideration is especially relevant in circumstances where there is a known or considered risk that the other party to a contract would not pay if a judgment or award were to be made against it. That is often going to be the case when doing business in emerging markets, where the risk of default is a known one, but the potential for high reward is considered to outweigh that risk.