Strategic tips on enforcement for in-house counsel – making sure you get the payment under your award
By Yaroslav Klimov and Andrey Panov
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.
Before the dispute
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 be contrary to public policy in many jurisdictions.
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.
Many deals are entered into with shell companies, newly incorporated companies or special purpose vehicles, which by their nature may have few 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.
Dispute resolution clause
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.
The clause must be valid and enforceable in the relevant jurisdictions, namely
- Where the proceedings will take place.
- Where enforcement against assets will take place.
It is also advisable that the clause is valid and enforceable in the home jurisdiction of the counterparties to avoid parallel proceedings.
The dispute resolution clause must be drafted to fit the parties. For example, when a State or State owned entity is a party, it is advisable to consider including clear waivers of State immunity from suit, enforcement and execution.
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 resolved by arbitration.
When a dispute arises
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 and 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 if 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. 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 may also be worthwhile 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, because only by understanding the types of assets and their location can the claimant know which jurisdictions it will be dealing with at the enforcement stage. Also, it is better to find out if the defendant has no assets before commencing proceedings, rather than after expending time and cost obtaining judgment or an award.
At the enforcement stage
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. Freezing a defendant’s assets is often a very effective tactic to help achieve a post-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. 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 a solid understanding of arbitration law and practice in order to be able to assist local judges who may be less familiar with international arbitration.
Yaroslav Klimov is a partner and the Head of Russia/CIS Dispute Resolution Practice based in the Moscow office of Norton Rose Fulbright.
Andrey Panov is a senior associate in the Moscow office of Norton Rose Fulbright.