Here, David Vaughan and Sneha Nainwal illuminate what really happens in the geopolitical shifts between countries: they discuss changes of government, the complexities of foreign law, and exiting binding cross-border contracts
It is often standard practice for governmental bodies, public institutions and state-owned entities to do business with suppliers all around the world. These business arrangements – often based around procurement projects – will be underpinned by contractual agreements. However, in many cases, for any number of reasons, one party may wish to terminate the contract.
Disputes between sovereign nations, parastatal companies and suppliers arising from public sector contracts are becoming increasingly common. These can often occur as a result of a change of government, and a new executive who may be determined to get out of a previous administration’s onerous contractual commitments.
In today’s ever-changing geopolitical world, knowing the ins and outs of the contract is essential and there are several critical steps that need to be taken when resolving high-value cross-border disputes. So how should governments and public bodies protect themselves against – and similarly react – in the event of a breakdown in a cross-border supplier relationship?
Relevant foreign laws
At the very outset, it is advisable for parties to pro-actively consider the foreign state’s laws, particularly around procurement, when first formulating an agreement. This is crucial as a breach of foreign laws (including procurement laws) may, in some jurisdictions, render a contract void, voidable or unenforceable. Similarly, the English Courts can refuse to enforce contractual obligations in cases where the object of the impugned contract is illegal in the country of performance.
In a similar vein, it is wise to also carefully consider individual local laws when forming the contract. For instance, does an agreement with a Sovereign State need to be witnessed and executed as a deed?
Or are there any additional implied obligations such as the duty to negotiate ‘in good faith’ and for contract terms not to be ‘unconscionable’? It is strongly advisable to engage an experienced local lawyer and seek a legal opinion on the validity of the contract before it is signed.
Terms of the Contract
While agreeing to the terms of the contract, parties should pay particular attention to the jurisdiction and governing law clauses, as these have an important role to play in cross-border contracts.
A jurisdiction clause determines which courts will have the right to hear the dispute if one arises. A well-considered decision can help to avoid slow and costly litigation and prevent the parties from commencing parallel litigation proceedings simultaneously in multiple jurisdictions. The governing law clause determines which country’s laws would apply to the interpretation of the contract and the respective rights of the parties.
Choosing the jurisdiction is a crucial decision, particularly for contracts in a complex supply chain, as certain national courts may have greater expertise in dealing with international commercial disputes and their laws may have suitably evolved to adapt to international disputes of such kind. Parties must carefully consider whether their choice of jurisdiction is exclusive or non-inclusive.
Similarly, it is important to be mindful of any known political or cultural sensitives which may affect either the contract or a cross-border dispute which arises from it, as wider implications may extend beyond the basic commercial relationship of the parties. If there are likely to be more sensitive complexities arising, it is best to consider these from the outset and make any advisers aware, so that they can be taken into account as the case develops.
Likewise, a governing law clause allows the parties to choose a set of laws that will apply to the interpretation of the contract, and its effect if a dispute arises. This is not just for direct contractual obligations, but also regarding wider non-contractual obligations, including actions arising in compensation for defective products or unfulfilled services.
Agreeing on a choice of governing law clause is important as it provides the parties with the certainty that they need in cases where an exit from the contract is required. If a governing law clause is not identified, the court hearing the dispute will have to first determine which law applies to the contract, and any related non-contractual obligations, before it can resolve the dispute. This can be a complex judicial exercise, involving interpretation and application of conflict of laws principles, which inevitably leads to the loss of further time and money for the parties as well as increased uncertainty.
In cross border contracts involving an international supply chain, an arbitration clause is often helpful. As an alternative to court jurisdiction, parties to a commercial contract can agree to have their international disputes finally resolved by arbitration. Parties must carefully select the arbitration seat, and their preferred set of arbitration rules, and incorporate it in the contract for clarity.
Arbitration is very different to litigation, which requires a court to determine issues. Instead, arbitration involves the parties in dispute working alongside an independent third party, with the aim of resolving the dispute outside of court. As opposed to litigation, the arbitration process is very private and generally more informal, often making it the preferred method of dispute resolution for international disputes, particularly those of a sensitive nature. Additionally, unlike court cases that can take years to be heard, arbitration can progress quickly.
One of the key advantages of arbitration is the ability to enforce the award internationally under the New York Convention and the ICSID Convention, which provide a simple and effective approach to resolving international disputes with the State or state-owned counterparty. However, when it comes to enforcement, certain jurisdictions are more arbitration-friendly than others and parties are strongly advised to factor this is in before seeking enforcement of an arbitration award in a given jurisdiction, particularly when the counterparty is a Sovereign State or state-owned entity.
Project Management
With this in mind, a clear project management approach should be employed from the outset to avoid confusion as the case around a cross border dispute develops.
A central online system is often put in place to control the management of documents and reduce costs. By setting this up at the outset, parties can ensure geographical boundaries do not hinder progress, that all information is available on a central platform and that clear parameters are set, avoiding the duplication of efforts on tasks and further costs.
It is also advisable to seek professional opinion from foreign law experts where the case in question involves complex issues of foreign law.
With business in emerging economies thriving, many companies are keen to get involved and there are numerous high-value contracts out there for the taking. Yet organisations willing to sacrifice a ‘safe’ jurisdiction for dispute resolution in return for potentially lucrative commercial gain should be aware of the risks they could face, should a dispute arise. However, by conducting thorough due diligence at the outset and seeking local advice when required, companies can lessen the risk of a fall out in the event of contract termination.
David Vaughan
International dispute resolution partner
Sneha Nainwal
International dispute resolution associate
