A Legal Perspective on Trends in International Trade Opportunities & Challenges Faced by U.S. Lawyers
By Neil Klein
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As they say, “international trade makes the world go round.” Or more accurately, international trade goes around the world.
The future of shipping is dependent on international trade. And international trade cannot exist without shipping (or other forms of transportation, such as road, rail or air). In other words, shipping and trading go hand in hand, like the “wet with the water.” The buying, selling and carrying of cargo is truly an international business. And as shipping and commodity trading lawyers, we are required to advise businesses on the international pitfalls and strategies that confront them.
Globalization is no longer just a trend; it is the dominant business model and not likely to change very soon. So lawyers have to be up to the challenge.
B. New Markets & Players
The question is what does the future hold with regard to international trade? Even though global trade collapsed during the financial crisis from about 2007 – 2011, it has since rebounded. And with the rebound, it appears there are new players with different geography.
It is anticipated that world trade tonnage as of 2010 will double by 2020, China will outstrip the U.S. in exports to Europe, Europe will be the most important market for exports from sub-Sahara Africa, and trade from Europe to Asia Pacific (excluding Japan) will exceed the U.S. Clearly, the center of gravity for international trade has shifted to Asia,1 particularly Singapore, India and China. And China faces stiff competition from Vietnam and Bangladesh.
All these changes, driven by a growing world population and demand for product, will affect the sale of commodities and the ships that transport them on a global scale. International lawyers must therefore be prepared to deal with the legal systems in myriad countries, and in turn know lawyers in those different jurisdictions that can advise them and their clients.
II. Challenges & Opportunities re International Trading Issues
A. Good Contracts
From a U.S. lawyer’s perspective, and assuming the client is a U.S. entity or has a U.S. connection, the challenge is to ensure they (among other things) have clear and concise contracts and are protected in the event of a default (non-payment, defective or missing product etc.) by the other party.
Nevertheless, for specific commodities, trading is often regulated contractually by certain well-known organizations with standard terms and conditions, e.g. GAFTA, FOSFA etc. In those instances, the challenge may be to ensure the client fully understands their obligations and rights thereunder.
Further, if the dispute has matured to the litigation stage (assuming all avenues for a negotiated resolution, including mediation, have been exhausted), the lawyer should be prepared to focus on key contractual provisions, such as jurisdiction, choice of law, venue, and should also weigh post-judgment considerations, such as the ability to obtain a judgment or arbitration award that is enforceable and collectable anywhere in the world.
The opportunity would be to advise a client to negotiate an agreement with U.S. governing law, U.S. courts as having jurisdiction, and a specific venue within the U.S. where any dispute can be heard. It is well known the U.S. has an excellent judicial system. Courts are accessible, judges (and juries) are smart, and usually render well-reasoned decisions or judgments. Also, U.S. law is well-developed, with applicable precedent (stare decisis) to ensure uniformity and transparency, and the U.S. has a well- established appellate process.
B. Obtaining Security
An important pre-judgment remedy for consideration is seek security where you can find it. This can be challenging, especially if the target entity is ducking and diving, hiding assets and/or moving them around to avoid detection.
Step One would be to conduct an asset search. There are companies (such as Gray Page) that specialize in these types of searches. The U.S. is a particularly good place to start assuming a U.S. connection, since U.S. laws make it relatively easy to obtain public (and not-so-public) information and intelligence on companies and individuals. If the search locates assets, Step Two would be to try and attach those assets as security for the claim to be litigated or resolved by arbitration.
Legal regimes around the world should be considered before attaching or arresting assets. The U.S., South Africa and Singapore are favored destinations.
In the event of a maritime claim, it is well-known that under U.S. law, Supplemental Admiralty Rule B provides an avenue for attaching property of a defendant (even if in the hands of 3rd parties), if the defendant is not found within the district where the action is brought.
1. Attachable Property
The Rule refers to tangible or intangible personal property. Courts take an expansive view, including:
- real property
- un-matured or partially-matured debts, including charterer’s obligation to pay charter hire
- monies in bank accounts
- certain contingent interests, such as defendant’s interest in arbitration award
Rule B does not identify the specific property interest that a defendant must have before it is subject to seizure. The property interest can include bunkers or funds, and the property does not have to be the exclusive property of the defendant.
2. Found in the District
A defendant can defeat a Rule B attachment by being “found within the district,” e.g. by showing the company is registered in the jurisdiction and had appointed a registered agent for service of process (often done hastily if the entity suspects its property is about to be nabbed!).
3. Maritime Claim
There must be a maritime basis for attachment to invoke admiralty jurisdiction i.e. “salty” connection. From an international trading perspective, what if the dispute involves a paper trade v. physical trade?
For example, “forward freight agreements” (FFAs, also known as forward freight swap agreements) are commitments to perform in the future a shipping service between ship owners, charterers or traders; the parties contract to pay the difference between a price agreed today and the future price of moving a product from one location to another, or for the future price of hiring a ship over a period of time.
Question: is an FFA a “maritime contract” sufficient for admiralty jurisdiction, or is it merely a financial instrument/derivative that allows parties to hedge against a future rise in the freight market? Traditionally, under U.S. law, a maritime contract “relates to a ship in its use as such, commerce or navigation on navigable waters, transportation by sea & maritime employment.”
FFAs and FFSAs therefore pose an interesting question as they are a hybrid of a shipping contract and a financial derivative agreement. U.S. district (i.e. trial) courts appear to have accepted FFAs as a maritime contracts despite their “financial nature,” but the issue has not been decided any U.S. Court of Appeals nor by the U.S. Supreme Court.
C. Enforcing Foreign Arbitration Award in U.S.
Arbitration is a popular and cost effective alternative to litigation, especially with regard to trading disputes. International arbitration activity continues to increase through non-government international trade groups that specialize in various types of products for their members,2 as well as institutions that resolve international trading disputes.3 Even if a contract does not require arbitration, the parties may voluntarily elect to arbitrate a matter to avoid the time and expense of litigation.
It is therefore important for lawyers and their clients to consider enforcement of any arbitration award in their favor, including in the U.S. where awards can be confirmed and enforced via the New York Convention4 (NYC) (there are currently 148 “Contracting States” and it is open to any member state of the U.N. or party to the International Court of Justice).
Under the NYC, each Contracting State must recognize an arbitration award as binding and enforce them in accordance with the procedural rules of the country where the award is made; however, there are exceptions:
- invalid arbitration agreement
- lack of notice
- scope of award exceeds terms of the agreement
- arbitral authority was outside scope of arbitration agreement
- award has not become binding or has been set aside
- awarding arbitral body lacks jurisdiction
- enforcement would be contrary to foreign policy of recognizing country
The mechanism in the U.S. through which the NYC is implemented is the Federal Arbitration Act, whereby federal courts have jurisdiction to confirm a foreign arbitration award, enforce an arbitration agreement, and appoint an arbitrator under that agreement. There is a 3-year limitation to confirm an award, which starts running when the award is decided by the arbitrators, not when it becomes final.
D. Seeking Discovery in the U.S. to Aid Foreign Arbitration or Litigation
It may not be universally known, but persons involved in litigation or arbitration outside the U.S. may obtain evidence, through deposition testimony and document production, from individuals and corporations under U.S. law (Section 1782 petition). This means foreign lawyers can use U.S. style discovery to enhance their case.
1. Procedure & Factors
An ex parte petition is filed with the federal court in the district where the person/entity from which information is sought is located. The court can issue an order fairly rapidly, and granting the petition is in the discretion of the judge, based on the following:
- Does the person or entity reside (or are they found) in the district where the action was filed
- Does the discovery relate to evidence in the form of testimony or production of things
- Is the discovery for use in a proceeding before a foreign tribunal
- Is the application by a foreign tribunal or “any interested person”
Foreign tribunals generally accept discovery under Section 1782 since the evidence is (a) taken under a U.S. statute intended to aid foreign tribunals; (b) ordered by a U.S. federal judge; and (c) obtained under penalty of perjury. Evidence has been accepted from London to China, and places in between.
Factor 1 relates to jurisdiction. For example, the procedure can be used in the case of a vessel coming into a U.S. port to bunker or load/discharge cargo, to obtain documents on board or depose crew; obviously advance planning would be good, so a court order can be obtained in time and served as soon as the vessel arrives at the dock or bunkering station.
Factor 2 relates to scope of evidence sought. The request can include depositions of specific persons or “person most knowledgeable” at a corporate entity, as well as specific documents which are not available in the foreign tribunal’s jurisdiction. For example, an applicant can depose a bank, third-party agent or manager for information or documents re bank accounts, assets, etc. to aid future enforcement under an award or judgment. A party can go on a well-directed “fishing expedition,” common in the U.S. as being reasonably calculated to lead to the discovery of admissible evidence.
Factor 3 relates to the type of foreign tribunal. In the context of litigation or international proceeding, this was extended in mid-2012 to include private arbitration.
Factor 4 relates to type of person entitled to use the procedure. The definition of any interested person is quite broad. For example, U.S. courts have granted petitions to a person before the Commission of European Communities, the brother of a decedent in a foreign inheritance proceeding, and an agent for court-appointed trustee of a foreign debtor (not an exhaustive list, and includes anyone directly or indirectly involved in a foreign litigation or arbitration).
If you are party to a foreign proceeding, and need documents or testimony from a person or corporation within the U.S., do not be intimidated by the U.S. legal system. A petition can be done fairly quickly with a short turnaround to obtain an order. Further, since U.S. discovery rules are quite liberal, topics for testimony or documents that may be shielded in other countries are often “fair game” under U.S. rules. And the petition is “secret” until the court order is granted and served on the unsuspecting party.
III. Going Forward
The new world order is expanding and trends in international trade are changing rapidly. This should present not only challenges but also opportunities for all lawyers, not just from a U.S. law perspective. Knowledge is increasing at light speed, and is accessible at the touch of a button or a Google search. How will we move forward?
It is important that lawyers adapt to our dynamic new environment by having a basic knowledge of all jurisdictions where their clients trade and do business, the law in those jurisdictions, or at least know lawyers in those jurisdictions who can quickly advise them on pressing matters.
1 Countries in South America, in particular Brazil, are also strong emerging players in the new global economy.
2 Grain and Feed Trade Organization (GAFTA) & Federation of Oils, Seeds and Fats Association (FOFSA) in London.
3 London Court of International Arbitration; International Chamber of Commerce, Swiss Chamber of Commerce & Industry; American Arbitration Association; China International Economic & Trade Arbitration Commission; Hong Kong International Arbitration Centre & Singapore International Arbitration Centre, all vie for attention.
4 The express purpose of the New York Convention is to encourage recognition and enforcement of commercial arbitration agreements in international contracts and unify standards by which they are observed and enforced.