High Growth Spells High Risk

Friday, August 1, 2008 - 01:00

Editor: Ian, would you set the stage for our interview today by describing the conference to be held in New York City on September 10 entitled "Current Trends in International Arbitration - The Special Problems that Arise When Contracting in the High Growth/High Risk Economies"?

Meredith: For corporate counsel who represent U.S. business doing business abroad this conference comes at a singular moment. A number of regions around the world are experiencing significantly higher growth rates than that taking place in the U.S. and Western Europe. Therefore, for U.S. and Western European companies, these high-growth markets represent increasingly attractive places for investment in order to access higher returns than can be realized in the home countries. In certain sectors (including oil and gas and other natural resources), the location of the natural assets inevitably require businesses to enter into complex commercial arrangements in countries with higher commercial and political risk profiles. If you are not familiar with contracting outside your home market in the U.S. or in other traditional markets, how then do you deal with the situation when you are asked by your executives or your board to assist in the evaluation of the risk profile presented by a particular businesses venture in an emerging market?

What we are seeking to do in the New York seminar is bring together experienced lawyers from the regions that represent those high-growth markets in order to look at what the trends are, what the issues are within those markets and what the tools are that can be utilized to help particular corporate counsel expand their compass and feel more comfortable in advising their boards and executives on ways in which they can structure contracts related to doing business in those particular regions. We shall be looking at the following countries and hearing from arbitration lawyers from those regions: India, an exciting place for many businesses; the Greater China market; Latin America, which is particularly exciting for a lot of business people involved in natural resources; Russia, a challenging place in which to conduct business but a place with many opportunities; Africa, of particular interest for those involved in minerals and their extraction, and the Middle East. We expect to raise our audience's sensitivity to the key issues and to illustrate the role arbitration clauses can play in reducing both commercial and political risk in these high growth/high risk regions.

Editor: Taking a lead from Ian's article in the May issue of The Metropolitan Corporate Counsel , would you both agree that in order to have a viable arbitration award enforceable in a given venue, it is necessary to have a country with a supportive arbitration law and a supportive but non-interfering judiciary together with one which has ratified the New York Convention?

Meredith: I think rather than necessary it is imminently desirable that all those components be in place. However, if there is a business imperative to deal in certain countries and they lack all or some of those components, it becomes a question of risk perception - under what circumstances are you prepared to take on business in these areas and what then can you do about it? Arbitration is often the best of the alternatives, and it is desirable to ensure that all of those elements are in place so that you can ensure the greatest prospect of collecting, in a practical sense, on any arbitral award. There is a distinction to be drawn between the seat of arbitration and the position in the country of the contractual counter-party.

The seat prescribed in the arbitration clause should be one that has a supportive arbitral law and a supportive but non-interfering judiciary, but in certain situations a business may feel compelled to deal with a contractual counter-party that does not. New York Convention ratification is key for the seat, the country in which the contractual counter-party is located and the country in which the counter-party's assets are located and against which any arbitral award will be enforced.

Ciccu: It is very important that you have a country which has ratified the New York Convention, has a supportive arbitration law and its judiciary recognizes the importance of non-interference. To fall within the definition of a foreign award under the (Indian) Arbitration and Conciliation Act of 1996 ("the Act") the award must have been made within a Convention country. For the smooth and efficient conduct of arbitrations, it helps for all to know that the courts of the seat of arbitration would not interfere with the arbitration process or resultant award and that proceedings in such court are speedy. The perception - that in India the courts are both interfering and slow (for which there is considerable basis) - is one of the main reasons why no foreign company wants to arbitrate in India.

Editor: How important is it that the judiciary in a seat of arbitration is experienced in interpreting arbitration law and is capable of facilitating an efficient arbitral process?

Ciccu: Usually the seat of arbitration carries with it the jurisdiction of the courts for challenge to awards and general supervisory powers over the arbitration process. Therefore, the judiciary of the seat of arbitration is critical to the success of the arbitration generally as a means of dispute resolution in that country. Experience in interpreting the arbitration law so as to aid arbitration (rather than defeat its purpose) is of prime importance. Again, one of the reasons why arbitration has not been as successful in India as it should have been is the lack of experience and training in arbitration law on the part of the majority of judges. In the Indian context, given the large country that it is and the number of judges, it is difficult for the majority to have had the necessary experience.

Meredith: I think this is very important. In a number of progressive emerging markets new arbitration law has recently been adopted which may at first sight appear comforting, but many new adopters of arbitration legislation have yet to see their judiciary become properly trained and adequately experienced in its application with the consequence that there can still be material departures from accepted international practice in those countries in terms of non-judicial support.

Editor: Please explain how the Supreme Court of India sometimes uses Article 142 to interfere with court awards and potentially with arbitral awards .

Ciccu: Article 142 of the Constitution of India empowers the Indian Supreme Court (and no other court) to pass orders to the end of accomplishing justice. In my view, the Supreme Court has often resorted to it when it should not have; for example, the court has interfered with an arbitral award by reducing the rate of interest awarded by an arbitral tribunal. Up until now such interference has been limited to domestic awards although by inference it could also apply to international arbitration awards. In my view, Article 142 was not intended to be invoked in such cases.

Editor: Under what conditions, such as grounds of public policy, may an arbitral award fail to be enforced by a court in India?

Ciccu: The Indian court can refuse to enforce such an award if enforcement of the award would be contrary to the public policy of India. The term "public policy of India" was interpreted by the Supreme Court in Renusagar Power Co. v. General Electric Co . where the Court said that the term would include (a) fundamental policies of Indian law, and (b) interest of India or justice or morality. Ordinarily, therefore, in a purely commercial contract, the grounds of public policy to refuse enforcement of an award should not arise. Public policy does preclude, specifically, an award induced by fraud or corruption.

In respect of domestic awards, however, a domestic award may be impeached or set aside if the award is contrary to the public policy of India. In the domestic award context, the Supreme Court in ONGC v. Saw Pipes Limited , under "the public policy" head added additional grounds of patent illegality or held the award contrary to the express terms of the contract.

Editor: If arbitration is contemplated by a foreign party doing business in India, what measures should be undertaken in writing the arbitration clauses of the contract?

Ciccu: As the Indian law stands at present, we would generally recommend a client to(a) select a seat outside India in a Convention country, preferably the UK; (b) specify the law of the seat as the law governing the arbitration agreement in all respects; (c) select a foreign law as being applicable to the substance of the contract; (d) exclude the applicability of Part I of the Indian Act; and (e) provide for the chairman of the tribunal or sole arbitrator (as the case may be) to be from a neutral venue.

Editor: Would these same caveats apply with doing businesses in each of the BRIC countries?

Meredith: I think in general terms, yes, but you have to look a little deeper. If you run through the list, for instance, looking at Brazil, which poses a problematic situation of regional courts, a business may ideally seek to ensure that the seat of arbitration is outside of Brazil. One of the places which tends to provide the best of the Latin American seats is Santiago, Chile. This is why we have the head of the arbitration center in Santiago attending the New York Conference. The same points that have been made apply to other emerging countries. In terms of Russia, the question differs quite dramatically depending on how far east you go into the vastness of Russia. Moscow, or areas close to Moscow, is in a dramatically improved position from other parts of the country while across Siberia becomes a more problematic situation. Contracting with Chinese counterparties remains difficult. The seat should be outside the PRC. Hong Kong and Singapore remain popular seats. Hong Kong arguably has the edge due to the availability of greater enforcement options.

Ciccu: I would agree. I would add that one may be worse off in countries such as China and Russia as compared to India.

Meredith: China has attempted to centralize the processes around the Supreme Peoples' Court, but I am told by those who practice in the region that there is a major material difference between external pronouncements and practical effect. The written pronouncements may cause you to have more confidence in your ability to enforce a foreign arbitral award within China, but beyond setting a Hong Kong or Singapore seat, a business should look closely at practical commercial risk avoidance strategies because China remains the most problematic of the four BRIC countries.

Editor: How can those doing business in underdeveloped countries generally minimize the risk of nationally biased or adverse financial outcomes in using arbitration, mediation or dispute review boards?

Ciccu: In the Indian context, I think what is absolutely necessary is to provide for special courts with exclusive jurisdiction to deal with all disputes relating to or arising from any international commercial transaction, including the enforcement and execution of foreign awards and in respect of domestic arbitrations involving a foreign company. The selection of judges to these courts should be from those knowledgeable in commercial laws and experienced in arbitration law and whose integrity cannot be doubted. It would be an innovative and unique idea to add to the constitution of the bench one judge from a foreign nationality such as UK or other commonwealth country whose system of commercial laws may be to some extent similar. There should additionally be a mandatory time period for disposal of such disputes/actions. I believe such a step would greatly enhance investor confidence in India.

Please email the authors at ian.meredith@klgates.com and ciccu.mukhopadhaya@amarchand.com with questions about this interview.