Pointing to the importance of planning ahead to avoid expensive asset recovery proceedings, Michael Kim and Jef Klazen of Kobre & Kim provide an effective strategy to prepare for such eventualities.
The scenario is simple enough. Two commercial parties from different parts of the globe find themselves in court together. One party prevails and the other party, either by deceit or some other legal hurdle, is suddenly devoid of assets to satisfy the judgment. The prevailing party, having likely spent significant resources on the litigation alone, is stuck with the bill, and the true complexity now reveals itself through the myriad of ways in which a judgment debtor can hide and move assets beyond the judgment creditor’s reach.
The key to avoiding complexity and the inevitable cost associated with large-scale asset tracing and recovery efforts is to plan ahead. Planning for eventualities is a crucial part of forming any business relationship, and the incorporation of an asset recovery strategy at this early stage can greatly increase the likelihood of recovery down the line.
An important first step in developing a new business relationship is to determine where the counterparty’s assets are located and in whose name they are held. At this stage, the primary sources of information will be publicly available business records as well as any voluntary information provided by the counterparty. In most cases, these sources should be sufficient to determine where at least some of the counterparty’s fixed assets (such as factories, offices or infrastructure) are located, whether those assets are controlled by the counterparty itself or by an affiliated entity or person, and who the counterparty’s other business partners are that may, from time to time, owe accounts payable or other debts to the counterparty. Armed with this information, as well as a legal analysis of the discovery and enforcement options in the jurisdictions where the assets are located, it is then possible to estimate the likelihood that, if a business dispute arises and a favourable court judgment or arbitration award is obtained, a recovery can be made even if the counterparty will not voluntarily pay the debt owed.
Whether (and how much) a party may be able to recover can inform important initial decisions, including whether to enter into a business relationship with the counterparty at all (for example, the lack of assets in enforcement-friendly jurisdictions may warrant doing business with a competitor instead); whether to negotiate a financial arrangement whereby funds or other property are placed in escrow or otherwise under the control of an independent third party; whether to insist that an affiliate of the counterparty that controls valuable assets be made a party to the business contract so that a judgment or award can be obtained against the affiliate more easily; and what type of dispute resolution provision to negotiate.
To elaborate on the last point, at this initial stage the commercial party should have mapped out the location and ownership status of a counterparty’s assets and evaluated the enforceability of a possible judgment or arbitration award accordingly. This should directly inform the next stage of asset recovery planning, namely negotiating the proper dispute resolution provision in a contract – to arbitrate or to litigate, and in which jurisdiction?
On the one hand, courts, unlike most arbitration panels, have the power to issue relief on an ex parte basis, to issue orders against non-parties (including orders to turn over a party’s assets that it possesses or to produce documents requested by a party), and generally to enforce their own orders through law enforcement and criminal contempt orders – all of which can make resolving disputes through litigation preferable to resolving them through arbitration.
On the other hand, the cross-border enforceability of a judgment will depend on the laws, procedures and practices for the recognition of foreign judgments of the particular jurisdiction in which enforcement is sought. This means enforcement of judgments lacks the general uniformity that applies to the enforcement of arbitration awards as a result of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention. Under the New York Convention, to which currently 156 states are a party, an arbitration award issued by a tribunal with its seat in one signatory State must be given the effect of a domestic judgment in the courts of any other signatory State, with only a limited number of grounds on which recognition can be opposed. The wide enforceability of arbitration awards, together with other features that are unique to arbitration (such as the confidentiality of the proceedings and the parties’ ability to chose the arbitrators) can point to arbitration as the preferred dispute resolution mechanism.
If litigation is deemed the appropriate dispute-resolution mechanism, then it may be advisable to select as the designated forum a jurisdiction in which the counterparty’s valuable assets are located, so that a resulting judgment will be immediately enforceable against the assets located there without having to get the judgment recognised in another jurisdiction. Alternatively, a commercial actor could negotiate the designation of a forum whose judgments are considered to be reliable by the courts of the jurisdictions where assets are located, so that the likelihood of recognition is increased.
If, instead, arbitration is deemed preferable, then it is usually advisable to designate as the seat of arbitration a neutral jurisdiction that is a signatory to the New York Convention. Because the law applicable to the arbitration typically is the law of the seat – which may affect a number of different aspects of the proceeding, including an arbitration panel’s ability to order interim relief (irrespective of what the governing arbitration rules selected by the parties might provide) – and because an arbitration award can be challenged in the jurisdiction of the seat, selection of the seat of arbitration should involve an assessment of the domestic laws to determine whether they impose any limits on the arbitrators’ ability to issue forms of relief that will aid in the enforcement of the final award and to assess the degree of scrutiny that domestic courts apply in reviewing arbitration awards and deciding whether they should be vacated. Thus, considerations of enforcement are critical to selecting the appropriate seat of an arbitration when negotiating a contract’s arbitration clause. (Also important is the selection of which rules will govern the arbitration, and whether the arbitration will be constituted ad hoc or through an arbitration centre, but those issues are not further discussed in this article.)
The moment when a contract is negotiated is not the only time when a commercial actor can benefit from an early focus on asset recovery. If at any point during the business relationship a conflict between the parties begins to develop, there are often opportunities at that moment – before litigation or arbitration is commenced, and certainly before a final court judgment or arbitration award is issued – to improve the odds of recouping potential losses. As soon as a business dispute looms, the commercial actor should engage in some quick strategic manoeuvres, including: confirming the location of the counterparty’s valuable assets, assessing the enforcement regimes of the different jurisdictions where assets are located, and considering where a litigation or arbitration should be commenced, provided that this has not already been fixed in the contract. As discussed above, a prudent commercial actor will already have taken some of these steps at the beginning of the business relationship, but by the time a dispute arises the commercial actor typically will have obtained additional information about the counterparty’s assets, their location and which affiliates might hold title to those assets. Thus, the moment when a dispute arises is a key moment at which to begin developing a specific asset recovery plan in greater detail.
This means that it is also a good time to start laying the groundwork for requests for preliminary measures that can be made once a litigation or arbitration is commenced, with the aim of ensuring that assets will be available in the jurisdiction with which a final judgment or award can be satisfied. Such preliminary measures can include, for example, a request from a court or arbitration panel for a preliminary injunction that prohibits the counterparty from moving assets out of the jurisdiction or an order freezing certain specific assets with which a future judgment or award can be secured. In some jurisdictions, such as New York, an application can be made to the court for a preliminary injunction or attachment of property in anticipation of a foreign arbitration award, although the applicant will need to show that it is likely to be the prevailing party in the arbitration and that without the attachment the applicant is unlikely to be able to recover the amount of the award. The commercial actor can start laying the groundwork for a request for these types of preliminary measures by, among other things, locating assets in the jurisdiction that can be attached and building an evidentiary record of the counterparty’s recent or impending transfers of valuable assets or statements indicating an unwillingness to comply with an adverse judgment or award in order to demonstrate the need for preliminary measures.
It is important to note, however, that the legal regimes governing the availability of such preliminary measures can widely differ from jurisdiction to jurisdiction. Where the parties have chosen to submit their disputes to arbitration, usually the law governing the arbitration will be the law of the seat of the arbitration, which, as noted above, will typically dictate to what extent arbitration panels are permitted to grant preliminary measures, in which situations the courts may enforce preliminary measures issued by arbitration panels, and whether domestic courts may issue their own preliminary measures when such measures have already been issued by an arbitration panel. Also relevant to the availability and enforceability of preliminary measures are the terms of the arbitration clause and the arbitration rules to which the parties have elected to subject themselves.
Another important step that can be taken before a final court judgment or arbitration award is to develop and prepare for the enforcement efforts that will be taken as soon as the judgment or award is handed down. The critical issue here is speed. Most counterparties will not start hiding their assets (if they do it at all) until a judgment or award is issued against them, which means that the sooner one acts to enforce the judgment or award the more likely it is that the amount owed will be recovered. Such preparation for enforcement will include selecting the jurisdictions where the judgment or award will be converted into a domestic judgment, identifying opportunities for court-ordered asset discovery, and preparing the enforcement papers so that they can be filed as soon as the judgment or award is handed down. This will often give the commercial actor a distinct advantage in seeking to recover the judgment or award amount from a non-complying counterparty.
These steps and tools described above are not meant to exist in a vacuum. As business relationships change, so should the asset recovery strategies, and throughout the business relationship opportunities will present themselves to enhance the likelihood of recovery down the line. The point is that while often recoveries can be made even if a preparations for enforcement are not made until after the court judgment or arbitration award is issued, a commercial actor can greatly increase the odds of recovery through timely planning and consideration of enforcement issues at every decision-point in the business relationship. Thus, a prudent commercial actor will begin developing an enforcement strategy even before the business relationship is formalised – when the idea of an unsatisfied court judgment or arbitration award seems like a remote, unlikely scenario. As the business relationship progresses, additional enforcement-related steps can be taken so that if that scenario does arise, the commercial actor will be in the best position possible to make a complete recovery.