Your agreement as to any commercial transaction is only as good as the forum you chose to enforce it. That truism is too often neglected by business people who are concentrating on closing the deal and terms of payment and performance and do not consider what occurs if the agreement concluded needs to be enforced due to breach by the other party.
And the breach need not be based on ill will or dishonesty. Often a party encounters financial difficulties not anticipated when the agreement was signed and may not be able to perform. Indeed, if an individual is the party signing, it is not unique for that individual to suddenly face illness or death and the other party must determine how to salvage value from the agreement.
For that reason, the wise business person will have a written agreement which provides for practical and effective remedies if there is a breach. The thrust of this article, however, is to concentrate on one aspect of the international agreement which is vital: the choice of forum for resolution of disputes.
Under most law, contracts are enforceable in the locale in which they were entered, e.g. the last step needed to create a binding agreement was achieved. That may be a signature on the document, a confirming e mail or letter or written acceptance of a purchase order. This assumes no clause in the agreement providing for the forum for enforcement.
Where the matter is to be tried may be the most important issue in the agreement once the issue of enforcement arises.
Why Does the Forum Matter?
The reader should first review our article on Contracts before proceeding further.
When two or more jurisdictions are involved, such as different states or nations, the cost of proving a case in a foreign jurisdiction may be significant, indeed, significant enough that the locale for resolution is a critical issue to be considered.
A business in Belgium seeking to try their case in South Africa not only must retain local counsel, but must fly their witnesses to the locale, often for numerous court appearances, and provide food and lodging for what may be weeks of trial or hearings. Discovery, which is a vital tool in most litigation, must also occur thousands of miles away and if there are hearing contesting discovery or trial procedure, it is common for the client and perhaps the client’s witnesses to again have to make the trip to the forum.
This is not just expensive in terms of travel expense but in terms of lost time for key personnel. If you are seeking to close a deal in London, to have your best scientist or sales person caught in a court room ten thousand miles away may be a very expensive proposition.
One veteran of the courts once estimated that you have to double the cost of a case tried outside the jurisdiction and if the case is more than five thousand miles away, add another fifty percent to the cost of enforcing your contract.
Where the case is tried thus matters economically.
It also matters in terms of practical enforcement. Sadly, perhaps a third of the jurisdictions in the world are either corrupt or incapable of effective enforcement of their own judgments. Delays and failure of court personnel to even conform to their own set dates is not uncommon. Some court systems require what amounts to bribes to court personnel or you cannot obtain a date: bribes that are often against United States law. And judgments rendered in the currency of some locales are often of little value due to massive inflation. Put simply, trying a case in the Democratic Republic of the Congo, North Korea, Beirut or Kabul is simply not realistically possible and enforcement of a judgment in China so difficult that it is probably not worth the attempt. Court systems once relatively effective, such as Brazil, become ineffective if the economy collapses and to wait years for a trial date only to have it continued years more is endemic in such jurisdictions.
Safety of your own personnel is another key concern. To send employees with families to dangerous locales is a matter that requires very careful consideration and this office once encountered an opponent in an embezzlement case who sought to retain local thugs to intimidate witnesses in Spain. The security precautions we had to take were effective…but expensive for our client, an expense not initially factored into the litigation budget.
1. PICK A GOOD JURISDICTION AND FORUM IN THE CONTRACT DOCUMENTS: The parties may specify in the agreement what law will apply and the locale for resolution of any disputes. Indeed, they may designate the forum to decide disputes and often agree on mediation and arbitration of disputes in a neutral locale in which the reputation for probity is high. Typically, New York or London under the auspices of the International Chamber of Commerce (ICC) or International Centre for Dispute Resolution (AAA), the American Arbitration Association’s international division, is used for disputes in most of the Western world while Singapore under the auspices of ICC or AAA is used for disputes in the East. But any safe and neutral locale can be chosen for the forum in the contract and that decision is usually binding on the parties.
2. USE LETTERS OF CREDIT OR CASH UP FRONT: A vital aspect of any judgment is collecting the sums and merely obtaining your verdict in the ICC in London only gives you a piece of paper. You then have to have it enforced wherever the defendant has assets to attach and that can bring you right back to the locale you were trying to avoid. Letters of Credit allow the seller to have secured money in the bank that is released upon satisfactory inspection of product delivered and if there is a dispute, the money remains in the bank to be awarded as the court or arbitrator directs. Collection becomes easy to achieve and combining the selection of the proper forum plus letters of credit greatly increases your chance of recovery.
3. PICK YOUR HOME LOCALE AS THE JURISDICTION OF THE CONTRACT: The best solution if you live in the United States or Europe is to have the agreement provide for jurisdiction where you are located and the law of your home locale as the proper law to apply. When combined with a letter of credit, your own protection is maximized. If the other party does not like that, a third party forum such as London or Singapore is a good alternative. The worst solution is to seek to enforce without a letter of credit in a hostile forum.
4. CHECK OUT WHO YOU DO BUSINESS WITH: In many parts of the world, reputation is the key decision making factor in a business relationship. It behooves you to investigate closely any potential business venture and the people involved. A thorough background search is vital for any significant transaction. And it is always best to test a new business venture with relatively small transactions until you get to know the other party…though be careful of the bait and switch inherent. Many predators assure good initial transactions to build up confidence and only violate the contract when large amounts are at issue.
The ability to enforce an agreement in practical terms is as critical as pricing, delivery terms and quality of product or service. To concentrate on the former requirements and ignore the latter only assures that sooner or later your business will suffer the losses inherent in international business done without care.