Cross-border transactions involve different legal risks, and the potential for disputes in foreign jurisdictions is considerable. The resolution of disputes that arise in emerging economies, in particular, can present unique challenges. That said, there are a number of common issues which can be avoided if sensible precautions are taken at the outset or, if disputes do arise, they are handled with the right principles in mind. This article addresses the most common pitfalls when contracting internationally, and offers practical tips on how to avoid them and what to do if a dispute does arise.
Prevention is better than cure
Clearly, the most straightforward way of dealing with a difficult situation is to avoid it in the first place. Effective drafting at the outset will reduce the risk of a costly and time-consuming dispute at a later stage. Taking simple steps such as expressly providing for a governing law and jurisdiction, agreeing the most appropriate method of dispute resolution and sense-checking complicated clauses will ensure that drafting is as tight as possible. In addition, where a specific clause contains a mathematical calculation, for example, remember that it can be helpful to provide a worked example as a schedule to the agreement to avoid any subsequent uncertainty. Above all, an agreement should be workable and represent exactly what the parties have agreed; if not, it leaves the door wide open for a messy and costly dispute.
The possibility that a contract might end up being examined by a court of law should be always kept in mind. Accordingly, when drafting, consider the differing approaches to contractual interpretation taken in different jurisdictions. For example, in England and Wales (a common law jurisdiction), the Court will apply to an agreement its ordinary meaning, unless there is a clear mistake on its face, and will admit pre-contractual discussions in evidence only if they relate to the factual matrix in question. Conversely, in civil law jurisdictions, courts tend to be more willing to look behind the contract to ensure that pre-contractual discussions between the parties are given effect. It is, therefore, especially important that you keep a good paper trail of discussions when involved in the negotiation of a transaction involving an international element. You should also seek advice from local lawyers, particularly if you have little experience of negotiating transactions in the jurisdiction in question.
Any agreement, however basic, should always contain a binding governing law and jurisdiction clause and expressly provide for the method of dispute resolution (i.e. litigation in local courts or international arbitration). This will avoid any surprises or difficulties surrounding the resolution of any disputes that subsequently arise.
You should consider, in particular, which jurisdictions are “safe” in the context of your transaction – for example, where will any resulting judgment be most easily enforceable, or where are the other party’s assets located? This exercise will also ensure that you avoid any so-called “difficult” jurisdictions, such as those where there is a risk of political bias or where litigation is slow, costly and uncertain. The approaches of different jurisdictions to issues such as pre-claim procedure, disclosure and injunctive relief also may have a significant impact on the outcome of your case.
It is also important to be mindful of any cultural or political sensitivities which may affect the operation of your contract or any dispute arising out of it. For example, where you have entered into an agreement with a state entity or with a company that has a governmental connection, there may be wider implications surrounding the termination of that agreement which extend beyond the basic commercial relationship between the parties.
Know your contract
Whilst it sounds rather basic, it is vital that you know what the contract is. All too often, companies are unable to locate copies of the final, signed version of an agreement. Even if you do have a copy to hand, it is important that you check that there have been no subsequent variations or addenda to the original agreement. The question to ask is this: what have the people on the ground agreed and what are they actually performing? This is particularly important where you wish to terminate an agreement without providing grounds for a dispute.
The contract can include additional protections to secure payment, for example letters of credit provide protection against non-payment and retention of title clauses can allow recovery of goods.
Cross-border dispute management
If a dispute does arise and another jurisdiction is involved, you should instruct local lawyers who have a good knowledge of their local court system and any particular idiosyncrasies of it. Always engage lawyers who have a proven record of being responsive, providing solid legal advice and satisfying the requirements of their local courts.
As with any multi-jurisdictional commercial exercise, employing a project management approach from the outset will help to avoid difficulties emerging as the case develops. It will also ensure that costs, time and information are managed efficiently. Making use of technology, such as extranet sites, online document management tools and online meetings will help to reduce the financial burden. Clear reporting lines should also be established at the outset, together with appropriate parameters for each jurisdiction and/or team to avoid duplication of efforts.
Dispute resolution in emerging economies
Business in emerging economies is booming, and companies in the developed world are rushing to get a piece of the action. Where companies are willing to forego a “safe” jurisdiction for dispute resolution in return for a concluding a commercially beneficial deal, however, they are potentially subjecting themselves to the risk of bias – or simply the “unknown” – if a dispute arose in that jurisdiction.
For instance, courts in Russia and China are, historically, less open, which may prejudice the outcome of litigation in those jurisdictions. Similarly, although Brazil is generally becoming more pro-arbitration, it could be said that its arbitration legislation is less developed than in other jurisdictions and has a specific and unique regime. China’s arbitration regime can also be distinguished, for example, on the basis that ad hoc arbitration is not permitted. This means that the parties’ failure to select an arbitral institution would render the arbitration agreement invalid if the seat is in China.
Of course, providing for the law and jurisdiction of a foreign and/or emerging economy in an agreement should not be discouraged completely. If local advice is sought and any potential risks are identified in advance, there is no reason why that particular agreement cannot work or is “wrong”. The most important criterion is to ensure that any commercial danger or uncertainty is mitigated and known at the outset.
Did you know?
- In certain jurisdictions, the UK approach to pre-action correspondence would not be appropriate. In Belgium, for example, a Letter Before Action is not required and could serve as a catalyst to the other side commencing proceedings against you.
- In certain countries, you may, despite best efforts, lose control over jurisdiction: in the Netherlands, a successful application for attachment of assets can establish legal jurisdiction.
- ‘Without Prejudice’ may not afford the protection you think. In Scotland, admissions made in without prejudice discussions may be used against you unless a settlement offer is made. In many European states (with civil law jurisdictions), the concept simply does not exist and it may be necessary to protect your position in party to party settlement discussions by entering into a confidentiality undertaking.
- In certain countries, including Italy and Switzerland, witnesses are examined only by the Court and not by counsel. Lawyers, including in-house counsel, must take care not to discuss evidence with witnesses, cannot prepare them for examination and may not take statements from them.
- You may, in some disputes, be required as a foreign party to pay substantial sums into the local court as a ‘bond’ before proceedings can be commenced. This is particularly the case in Eastern European jurisdictions and in relation to real property.
- Professional Codes of Conduct in local jurisdictions should also be considered as they will be likely to bind in-house counsel, for example in France, where correspondence between lawyers is confidential, even from the client.