While there are cases that involve claims for declaratory relief or specific performance, disputes are most often about payment. A claimant goes into battle – spending time and money to develop strong arguments and clever case theories – only if it expects the proceedings to result in a payout.
There are several strategic steps that in-house counsel can take throughout the process to maximise their chances of securing payment.
Enforcement issues should be taken into account well before a dispute arises – they should be considered when 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 that they will not offend public policy in the likely place of enforcement. For example, a contractual penalty that is punitive by its nature may be unenforceable in many jurisdictions and may therefore cause problems with the enforcement of a future judgment or award.
Any recourse against the other party will be effective only if the party is likely to be able to pay. Parties should always undertake proper due diligence on counterparties – in particular, identifying what (if any) assets their counterparty has and where they are located.
All too frequently, the sole focus of due diligence is the transaction structure, rather than security for payment. An example of this 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 company, 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 more straightforward than endeavouring, often unsuccessfully, to use litigation to pierce the corporate veil at a later stage in order to reach an entity which has no assets of value. If security is not available, this risk should be factored appropriately into the transaction structure.
Dispute resolution provisions in the contract should be carefully drafted so as to be appropriate, valid and enforceable. While this might sound obvious, lawyers, arbitrators and courts often have to deal with ambiguous or pathological (ie, defective) arbitration clauses. As well as giving rise to satellite disputes over jurisdiction, pathological clauses can often create additional problems at the enforcement stage. Despite their importance, dispute resolution clauses are frequently negotiated at the eleventh hour and are often a standard-form, 'one size fits all' clause included from the boilerplate section of a precedent, rather than being tailored to 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 jurisdiction where the proceedings will take place;
- in the jurisdiction where enforcement against assets will take place; and
- ideally, in the home jurisdiction of the counterparties, as this is often where parallel proceedings are brought in breach of a dispute resolution agreement.
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 deciding which matters can be 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. However, obtaining a judgment or award is often only the start of the process; the successful party will sometimes need to enforce it, possibly in multiple jurisdictions. The domestic enforcement of foreign judgments or awards will vary between jurisdictions, so it is important to understand the approach taken in the relevant ones.
However, international arbitration owes its success in large part to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. 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 the enforcement of foreign court judgments.
Once a dispute has arisen, or circumstances have been notified which indicate that 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 choose an appropriate case strategy. Having a clear and well-formed strategy from the early stages will help to achieve end goals efficiently. It also allows the claimant to plan how it will tackle various issues which might arise in the course of proceedings. If the case involves a damages claim, a quantum expert should ideally also be involved at an early stage; if the quantum of losses is relatively low, it is better to know before commencing arbitration than two years into proceedings.
The merits review and case strategy should also consider enforcement issues (eg, the potential defences on which the defendant might rely 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 required, which can have an impact on the ability to enforce later on. For example, in some jurisdictions, it can be a defence to enforcement if notice is not served in a particular way. Other jurisdictions may object to default judgments. It is prudent to obtain advice from local counsel at the likely place or places of enforcement in order to avoid pitfalls.
It is also a good idea to 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 asset and their location can the claimant know the jurisdictions with which 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 to set realistic goals for recovery.
Again, it is better to find out that the defendant has no assets before commencing proceedings than after spending time and money obtaining judgment or an award. Moreover, the financial status of the defendant will determine whether urgent measures (eg, freezing injunctions) need to be taken in order to preserve the status quo, or whether other relief (eg, security for costs) should be sought.
Most judgments and awards are complied with voluntarily. However, for some claimants, obtaining judgment or an award is only the start of the process of securing payment. 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 and – for example – money payable to the defendant under contracts, court judgments or awards. Claimants should consider again whether it is appropriate to seek a freezing order over assets to prevent dissipation. Freezing a defendant's assets is often an effective tactic in helping to achieve a post-judgment or award settlement.
It is also important at this stage to assess that all necessary preliminary steps to enforcement, as required in the relevant jurisdiction or jurisdictions, have been taken. Although the New York Convention provides a global regime for enforcement of foreign arbitral awards, local procedural rules and court practice still have a role to play. Enforcement is not always a purely technical exercise. It is advisable to retain lawyers who are familiar with enforcement in that jurisdiction and who have not only relevant litigation experience before the local courts, but a solid understanding of arbitration law and practice. This will allow them to assist local judges who may be less familiar with international arbitration.
For further information on this topic please contact Yaroslav Klimov or Andrey Panov at Norton Rose Fulbright (Central Europe) LLP by telephone (+7 499 924 5101) or email ([email protected] or [email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
An earlier version of this article was first published in PLC Magazine.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
