Doing business with foreign companies safely

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I. Introduction

In any business, careful risk management is crucial to protecting your profits. One major and often overlooked risk is litigation risk, especially overseas litigation risk. This article will address the litigation risk that a Singaporean company may face when doing business with a foreign counterparty that fails to uphold its contractual obligations.

II. Risks of doing business with foreign companies

If a counterparty in a commercial contract does not deliver what they are supposed to, litigation against the counterparty may be necessary. If your counterparty is a Singaporean entity, litigation in the Singapore courts can be a relatively straightforward option. However, if your counterparty is a foreign entity, commencing litigation against them can be more difficult, especially if said litigation is to take place outside of Singapore. If you think you may need to litigate outside of Singapore, you should consider the following risks:

A. Foreign litigation risk

 i. Home team bias risk

Litigation in your counterparty’s jurisdiction specifically may come with additional risk. Find out whether that jurisdiction’s courts have a track record of ruling against foreign companies and in favour of companies from that jurisdiction. Statistics on this will not typically be publicly available so you should consult a law firm that carries on litigation in that jurisdiction to assess the magnitude of this risk for you.

ii. Judgment delay risk

The speed at which courts process their cases is also an important factor. If courts in a particular jurisdiction are backlogged (e.g. India), you can be effectively deprived of access to justice for years. In addition, if a jurisdiction’s procedural rules provide for extensive pre-trial motion practice, this can delay getting to trial by a matter of years (e.g. USA).

iii. Litigation cost risk

In some jurisdictions, litigation may be more expensive than in Singapore. Costs could be increased simply because litigation takes longer in that jurisdiction, perhaps because of a tradition of extensive pre-trial motion practice or of exhaustive discovery (e.g. USA). Litigation may also be more expensive simply because the market rate for legal fees in that jurisdiction is higher than in Singapore. Bear in mind also the additional exchange rate risk involved in having to pay legal counsel in a foreign currency whose value relative to the Singapore dollar may increase or decrease over the course of a long case.

Finally, litigating a case in another jurisdiction will result in travel costs for your company’s representatives and witnesses in having to fly to and stay in that country to instruct counsel, meet with experts, conduct depositions, prepare discovery or give testimony. You will probably also incur similar travel expenses as foreign counsel and experts will probably need to travel to Singapore to work on your case with you. These are costs you can avoid entirely by litigating in Singapore.

iv. Corruption risk

The two most common types of judicial corruption risks are political interference and bribery. The former occurs when politicians or staff from the legislative or executive branch interfere with judicial affairs, decisions or collude with judges in fraudulent schemes. Judges and other court personnel may face significant pressure to rule in favour of powerful political or business entities rather than in accordance with the law, and judges may even collude with politicians in some cases.

Bribery occurs when judges or other court officials accept bribes to exercise their influence over a case in a way that benefits the briber, such as ruling in a particular way. There are many jurisdictions in developing countries (e.g. The Maldives) (and to a lesser extent, in developed countries), where judicial corruption is known to exist and varies in prevalence from endemic to occasional.

Political interference and bribery are risks you need to consider when litigating in a foreign jurisdiction, particularly when your counterparty is a politically-connected or influential entity in that jurisdiction, and they are risks that can be dramatically diminished by litigating against your foreign counterparty in Singapore.

B. Litigating against a foreign party in Singapore

Successfully suing a foreign company in a Singapore court can sometimes present challenges, particularly if they don’t have a physical presence or assets in Singapore.

If your counterparty has no physical presence in Singapore, you will need to obtain leave of court to serve it with a summons outside of the jurisdiction. Your counterparty’s foreign address where they can be served should already be explicitly set out in your contract with them.

If you can obtain leave of court to serve your summons outside of Singapore, you will then need to find out what the legal requirements of that jurisdiction are to effectively serve someone with legal process and comply with them in order for the service of process to be effective.

These additional steps increase the uncertainty and risk of not securing an effective remedy – additional steps that would not arise if your counterparty was a Singaporean entity. If you succeed in effectively serving your foreign counterparty overseas, then it may either enter appearance by filing a memorandum of appearance indicating an intention to defend the suit, in which case the case will go on to be argued in the Singapore court, or it may simply ignore it.

C. Outcomes of litigating against a foreign counterparty

So you’ve successfully served your foreign counterparty overseas. What’s next? There are a few different ways of getting a judgment.

(1) Default judgment: If your foreign counterparty simply ignores your summons or fails to file a defence in time, you can apply for default judgment in your favour.

(2) Summary judgment: If your foreign counterparty has entered appearance and filed a defence, but it is clear that it has no real defence to the claim, you may apply to court for summary judgment in your favour.

(3) Judgment following a trial: You could go all the way through a trial and obtain a judgment at the end of trial.

(4) Settlement: If you reach a settlement with your foreign counterparty, you may withdraw or discontinue your action.

D. Enforcing a Singapore judgment overseas

Securing a judgment (or settlement) in your favour is the first step in successfully suing another party. The next step would be to enforce that judgment (or settlement) against that party’s assets. Doing so when those assets are not in Singapore involves a lot more risk and uncertainty than if they were.

To enforce a judgment overseas, you must first figure out where the assets of your foreign counterparty are – usually the jurisdiction in which your counterparty is incorporated. Then you have to try to enforce your judgment in that jurisdiction’s courts. If the assets are scattered across several jurisdictions, then you should figure out which jurisdiction’s courts are most likely to enforce a judgment from a Singapore court most quickly (or at all), and bring enforcement proceedings there first.

Then you are at the mercy of that jurisdiction’s procedural rules for recognising and enforcing the judgments of foreign courts. Depending on the jurisdiction, the court may not recognise a Singapore court judgment on a variety of grounds set out in that jurisdiction’s laws or if it does, it could take years, by which time the assets may have been dissipated.

III. Mitigating these risks

So it should be apparent by now that doing business with foreign companies is riskier than doing business with domestic companies. However, for many businesses, not doing business with foreign companies at all simply isn’t practical. The good news is that there are a number of ways to mitigate the risks we’ve discussed above. However, most of these require you to have considered these risks at the outset of the business relationship, rather than merely reacting to problems when they arise later.

It is crucial that when you enter into an agreement with a foreign company (or indeed any company) that you make an informed decision as to what dispute resolution provisions to include in it, as this is likely to have a dominant impact on the outcome of any dispute you may have in the future. Below are a number of possible permutations that we suggest, in decreasing order of desirability.

A. Ideal scenario: Arbitration in Singapore

Arbitration is a suitable dispute resolution method if parties value freedom in selecting the adjudicators of their disputes, confidentiality, and expedition of process. Arbitration is likely to be economically feasible for your dispute only if the value of your dispute is at least about S$500,000. The ideal dispute resolution scenario is to ensure that your contract is explicitly governed by Singapore law, and provides for disputes to be resolved by arbitration seated in Singapore.

This addresses all of the risks we discussed above. It eliminates foreign litigation risk. It eliminates the risks associated with serving process overseas. It also substantially mitigates the risks associated with enforcement of an award in your favour.

This is because the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) requires courts of all 161 contracting states (including Singapore) to recognise and enforce arbitration awards made in other contracting states. There is no equivalent convention for the enforcement of court judgments that has achieved any widespread international acceptance.

Therefore, the process for enforcing an arbitral award overseas is likely to be, relatively speaking, more straightforward and predictable compared to enforcing a court judgment in a foreign country. You should aim to avoid doing business with companies from the few remaining countries that have not ratified the New York Convention [1] if possible, unless they have substantial assets in a country that has ratified it.

B. Second best scenario: Litigation in Singapore

If your counterparty is not agreeable to arbitration, or if the value of your contract is too low for arbitration to be feasible, your contract should instead stipulate the following: (1) that disputes are to be resolved in Singapore’s courts; (2) that the foreign counterparty is required to appoint a process agent in Singapore to accept service of process in the event of a dispute. This will eliminate foreign litigation risk and the risks associated with serving process overseas respectively. The Singapore process agent will act as a local “representative”. Should you need to sue your foreign counterparty, you can simply serve the process agent in Singapore with the relevant documents at its local address, instead of trying to seek leave to serve the papers on the counterparty directly overseas.[2]

For your foreign counterparty to appoint a process agent properly, you should ensure that: (1) the process agent’s letter of appointment specifically refers to the agreement or agreements for which the process agent agrees to accept service of court process on behalf of the counterparty; and (2) the duration of appointment is clearly stipulated.

In addition to the above steps, it is also advisable to find out in which countries your counterparty keeps its assets, in order to plan what would be the most favourable jurisdiction in which to enforce a Singapore court judgment against it, if necessary.

C. Third best scenario: Arbitration in a neutral jurisdiction

If your foreign counterparty does not agree to subject your contract to the jurisdiction of Singapore courts, you should push for dispute resolution by way of arbitration in a neutral third country. Such venues may include popular international arbitration centres such as Hong Kong (a good regional option), Geneva (a popular option for intercontinental business), Paris, London, or New York. One advantage of agreeing to arbitration overseas rather than litigation is that you can appoint Singapore lawyers to act for you, regardless of where the arbitration is seated. This can result in an expectation of a certain standard of legal practice but without the high legal costs usually associated with other developed jurisdictions. More importantly however, this option eliminates process serving risk and mitigates enforcement risk.

D. Worst scenario: Litigation overseas

If your foreign counterparty insists on litigation in its own jurisdiction (i.e. refuses to do business with you under any other circumstances), you’ll need to consider the four aspects of foreign litigation risks associated with that country’s courts (see Section I above), and weigh the magnitude of those risks against the potential benefits of the proposed business relationship.

IV. Conclusion

In conclusion, litigating against a counterparty in a foreign jurisdiction comes with risks relating to home team bias, slow court processes, indeterminate costs, and the potential for corruption. There are also challenges in litigating against a foreign counterparty in Singapore’s courts, especially if they do not have assets in Singapore against which you can enforce a judgment.

Ultimately, you should get a Singapore lawyer involved in drafting your contract with a foreign counterparty from day one. This is so that your lawyer can assess the magnitude of the relevant risk factors, formulate a strategy for mitigating those risks as far as possible and professionally negotiate the safest possible business scenario for you. This will cost a lot less than dealing with the fallout from a carelessly drafted “DIY” contract later on.

 

[1] A full list of those countries can be found here: https://en.wikipedia.org/wiki/Convention_on_the_Recognition_and_Enforcement_of_Foreign_Arbitral_Awards#States_which_are_not_party_to_the_Convention

[2] https://www.abinitioprocess.com/apps/blog/show/44433937-process-agents-in-singapore

THIS IS A REPRODUCTION OF AN ARTICLE WRITTEN BY NADIA MOYNIHAN WITH THE ASSISTANCE OF FU WAN YING AND FIRST PUBLISHED BY ASIA LAW NETWORK. THE ORIGINAL ARTICLE CAN BE FOUND HERE.
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