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While there are cases that involve claims for declaratory relief or specific performance, more often than not, disputes are about payment. A claimant only goes into battle, expending time and money developing strong arguments and clever case theories, because it expects to secure payment at the end of the day.
There are several strategic steps that in‑house counsel can take throughout the process to maximise the chances that the pay day eventually arrives.
Enforcement issues should be taken into consideration well before a dispute arises. These should be considered at the time of negotiating and drafting the contract. Many issues can be foreseen and avoided at this stage by proper preparation.
The obvious starting point is to ensure there is an enforceable obligation. This requires clear and careful drafting of relevant contractual provisions to ensure that they are valid and enforceable as a matter of the governing law, and also that they will not offend public policy in the likely place or places of enforcement. For example, a contractual penalty that is punitive by its nature may not be enforceable in many jurisdictions and, as such, may cause problems with enforcement of a future judgment or award.
Moreover, any recourse against the other party will only be effective to the extent the party is likely to be able to meet its obligation to pay. Parties should always undertake proper due diligence on counterparties, in particular identifying what (if any) assets their counterparty has and where those assets are located.
All too frequently, the sole focus of the due diligence is on the transaction structure, rather than security for payment. An example is the use of shell companies, newly incorporated companies or special purpose vehicles for transactions, which by their nature may have little or no assets against which to secure enforcement. When dealing with these types of companies, it is worth considering whether to obtain security for the counterparty’s obligations. This could be in any suitable form, from personal or corporate guarantees to a pledge over assets.
Getting the appropriate security in place is usually easier and more straightforward than endeavouring often unsuccessfully, to use litigation to pierce the corporate veil at a later stage in order to reach the entity which does have assets of any value. If security is not available, then this risk should be factored appropriately into the transaction structure.
Dispute resolution provisions in the contract should be carefully drafted so that they are appropriate, valid and enforceable. While this might sound obvious, time and again lawyers, arbitrators and courts have to deal with ambiguous or pathological (i.e. defective) arbitration clauses. As well as giving rise to satellite disputes over jurisdiction, pathological clauses can often create additional problems at the enforcement stage. Unfortunately, despite their importance, dispute resolution clauses are frequently negotiated at the eleventh hour and will often be a standard form “one size fits all” clause included from the boilerplate section of a precedent, rather than one that is tailored to suit the parties and circumstances.
There are a number of important considerations when drafting an effective dispute resolution clause. The clause must be valid and enforceable in the relevant jurisdictions, namely
The dispute resolution clause must be drafted to fit the parties. For example, when a State or State owned entity is a contractual counterparty, it is advisable to consider including clear waivers of State immunity from suit, enforcement and execution. Without full waivers, a judgment or award is unlikely to be worth the paper it is written on.
The clause must also be suitable for the types of dispute that are likely to occur. For example, not all jurisdictions have the same approach to what matters are capable of being subject to arbitration.
Finally, the choice of forum for the dispute is often as critical to enforcement as it is to the smooth and effective running of proceedings. For obvious reasons, the favoured choice for resolving a dispute is a neutral, unbiased, well‑established forum which processes claims without undue cost or delay. But often obtaining a judgment or award is only the start of the process: the successful party will sometimes need to enforce it, possibly in multiple jurisdictions. How foreign judgments or awards are enforced domestically will vary across jurisdictions, so it is important to understand the approach taken in the relevant jurisdictions.
International arbitration, however, owes its success in large part to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the Convention). With 157 contracting state parties, the Convention has a global reach and prescribes a simple regime for enforcing foreign arbitral awards, which does not allow questions of merit to be revisited and has only a few grounds for resisting enforcement. There is no equivalent for enforcement of foreign court judgments.
Once a dispute has arisen or circumstances have been notified that indicate a dispute is about to arise, it is always advisable to conduct a preliminary merits review. This will help to identify strengths and weaknesses in the case and to choose an appropriate case strategy. Having a clear and well‑formed strategy from the early stages will help to achieve the end goals in the most efficient manner. It also allows the claimant to plan in advance how to tackle various issues which might arise in the course of proceedings. If the case involves a damages claim, then ideally a quantum expert should also be involved at an early stage. It is certainly better to know before commencing arbitration that the quantum of losses is relatively low, rather than two years into proceedings.
The merits review and case strategy should also consider enforcement issues, such as the potential defenses that the defendant might rely on in its home jurisdiction. The remedies and the relief sought in the proceedings should be chosen with enforcement in mind. There might also be certain procedural steps that are required which can have a later impact on the ability to enforce. For example, in some jurisdictions, it can be a defence to enforcement if notice is not properly served in a particular way. Other jurisdictions may object, for example, to default judgments. It is a good idea to obtain advice from local counsel at the likely place or places of enforcement to ensure that pitfalls are avoided.
It is also a good idea to once again conduct research on the defendant’s assets at the outset of a dispute. In fact, this should be done as part of the early merits assessment stage, because only by understanding the types of the assets and their location can the claimant know the jurisdictions that it will be dealing with when it comes to enforcement. Forensic firms can conduct a high‑level exercise at a relatively modest fee. This is usually money well spent as it also helps set realistic goals for recovery.
Again, it is better to find out that the defendant has no assets before commencing proceedings, rather than after expending time and cost obtaining judgment or an award. Moreover, the financial status of the defendant will determine whether urgent measures, such as freezing injunctions, need to be taken in order to preserve the status quo or whether other relief such as security for costs should be sought.
The majority of judgments and awards are complied with voluntarily. However, for some claimants, obtaining judgment or an award, is only the start of the process of getting paid. If a defendant fails to pay, further proceedings are necessary to enforce the judgment or award.
At the enforcement stage, it is necessary to undertake detailed tracing of the defendant’s assets, including tangible assets as well as, for example, money payable to the defendant under contracts, court judgments or awards. Claimants should also again consider whether it is appropriate and necessary to seek a freezing order over assets to prevent dissipation. Freezing a defendant’s assets is often a very effective tactic to help achieve a post‑ judgment or award settlement.
It is also important at this stage to again assess that all necessary preliminary steps to enforcement, as required in the relevant jurisdiction or jurisdictions, have been taken. Although the Convention provides a global regime for enforcement of foreign arbitral awards, local procedural rules and court practice do still have a role to play. Enforcement is not always a merely technical exercise. It is advisable to retain lawyers familiar with enforcement in that jurisdiction, who not only have relevant litigation experience before the local courts, but who also have solid understanding of arbitration law and practice in order to be able to assist local judges who may be less familiar with international arbitration.
This article was previously published in PLC Magazine – March 2018.
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© Norton Rose Fulbright LLP 2021