International commercial agreements – how to enforce?

10 May 2019

There is a tendency for UK companies who do business internationally to seek to ensure in their contracts that English law applies, and for disputes to be held in the English courts. For English companies there is the comfort of a known legal system, a lack of corruption in the legal process, and access to local courts with the cost savings that follow from that. In many circumstances those are all good reasons, and may well be appropriate, especially if the foreign entity has UK based assets and/or operations.

However where the foreign entity has no UK presence, how are things going to work if a contractual dispute arises? Where the contract provides for English law to apply, you may well be able to seek redress in the English courts. If you are successful, and judgment is given in your favour, then what? If the other side has no UK based assets how do you actually receive any money? The answer is to then take your English judgment and seek to enforce it in the relevant foreign jurisdiction in which the counterparty operates.

The potential problem then is whether the relevant foreign jurisdiction concerned will actually enforce your English judgment. Whilst enforcement of a judgment made in England, is possible in a variety of countries as a result of various treaties entered into by the UK, e.g. the Hague Convention on Choice of Court Agreements (the Hague Convention), there are many countries (mostly outside of Europe) who are not parties to such conventions, or similar bi-lateral agreements with the UK, making the enforcement of  judgments in those jurisdictions particularly difficult. The ability to do so will depend on the particulars of the law in the relevant jurisdiction, and in many cases will simply not be possible. In that situation, even though the governing law of the underlying contract may specify English law, the English-based party may be forced to try and take their contract and try and institute a completely new set of proceedings in the foreign jurisdiction, which ultimately will be determined by the laws of that foreign jurisdiction, effectively defeating the whole point of the jurisdiction clause in the original contract.

So what alternatives are there? One is to consider making arbitration the dispute resolution procedure in the contract. A good reason for doing so is that many more countries are signatories to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) than the Hague Convention. Consequently any country that is a signatory to the New York Convention would (with limited exceptions) have to recognise and enforce any arbitral award made in any other country which is also a signatory to the convention. For example, as China is a party to the New York Convention (as is the UK and the US), arbitration is often seen as the best dispute resolution mechanism when contracting with Chinese businesses. Arbitration also has the added value of being confidential, unlike traditional court proceedings which are generally matters of public record, and potentially quicker. It can however to be more expensive, given that you have to pay the additional costs of the arbitrators and the venue for the arbitration.

However, a word of caution, to achieve any kind of certainty an arbitration clause requires careful drafting; such a clause would need to set out the governing law, the seat of arbitration (London and Paris are popular choices for European based arbitration, as are Hong King and Singapore in Asia), and the rules on which the arbitration will be based, plus the terms of payment of costs and how many arbitrators are to be appointed to resolve the dispute. The choice of the site of jurisdiction, and choice of law, can be critical. What most UK companies want, when considering a site for arbitration, is a jurisdiction with a good choice of quality arbitrators, a governing law which is fair, reasonable and predictable, and a lack of corruption. That is why Singapore is a popular site for arbitration when dealing with Asian based counterparties given the high reputation of its legal system, and the integrity of its judges and arbitrators.

What arbitration can provide, particularly when dealing with contracting parties in far flung jurisdictions, is greater certainty that at least, if a decision is made in your favour, that you can enforce the award made. Depending on the nature of the underlying contract concerned, that can be much more valuable in the long run (despite possible cost implications), than clutching on to an English court judgment with little hope of ever actually getting it enforced.

The content of this article is for general information only. If you require any advice please contact Samantha Woodley or a member of Birketts’ Corporate Team. Law covered as at May 2019.

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