In 2016, I posted “Five Essential Things All Business Owners (and Their Lawyers!) Should Know Before Signing Global Contracts” with real people– and preventing lawyerly goof-ups– in mind. But lately, I’ve realized that some elaboration is necessary.
Why those five things matter ought to be apparent. But some nuance is necessary, so I offer a five-part series that elaborates on each point, more for than benefit of lawyers than for the business owners who want to venture abroad.
Those five things, in turn…
- Designate an agent for service in the United States.
- Include a choice of venue.
- Choose a governing law.
- Determine the operative language.
- Secure a guarantee of judgment debt.
To elaborate on Point Five…
Secure a guarantee of judgment debt.
Face it. As I wrote in July, a lawsuit ain’t over ’til the client gets a check. An eye toward enforcement of a judgment is absolutely critical when litigation is in the planning phase. The key is to think about it even earlier– when the contract is in the drafting phase– in order to prevent a breach from occurring at all. Our clients honestly don’t expect the other party to welch on the deal, but it’s our job to give them a reality check. Even though we hope it never happens, we have to anticipate it, and if we can do that, well… an ounce of prevention truly is worth a pound of cure.
So think ahead to the end of a potential lawsuit. You’ve done everything right– served properly, undertaken the perfect scope of discovery, won the right motions, and convinced a jury that your client was damaged as a result of the other party’s intransigence. You’re awarded seven figures in damages and your client is ecstatic.*
But… harumpf. Your losing opponent (let’s say they’re from China) has no assets in the United States except a $170,000 corporate apartment in Galveston. At the outset, you tried to convince the client that choosing Chinese law, venue, and language would be a great hedge against a breach, but they insisted on… ‘Murica, damnit, we’re the greatest country in the world. They insisted on fighting it out here because they feared litigating over there.
Your defendant, counselor, is a turnip. As in “can’t get blood out of a…”
Forget about enforcing the judgment in China. Just don’t waste your time, because Chinese courts have enforced exactly ONE U.S. JUDGMENT in as long as anybody can remember. One. And that was between two Chinese citizens in a case that Chinese courts wouldn’t touch with a ten-foot pole.
What to do?
AHA! While your client dissed your Chinese law/venue/language recommendation, they did have the good sense to act on your recommendation that they get a guarantee of judgment debt. Exercise the guarantee, whatever form it takes, and you’re able to collect that vaunted check.
Whatever the type of transaction, there are always options. Sure, they’re likely to increase the cost of the transaction, but car insurance increases my cost per mile on the road, and I wouldn’t be without my coverage (or my agent, Irvin). I hope I never have to use it, but peace of mind is awfully nice. And if something horrible happens, I know I won’t have to live in a van down by the river.
- Collateral. Okay, so they only have that condo in Galveston. But they put it up as collateral on the contract, you file the proper lien, and you don’t have to litigate to enforce the judgment. Just act on the lien.
- Letters of Credit. Like a deep pocketed co-signer, banks provide letters of credit all the time. They may not be willing to back a Chinese party directly, but maybe a Chinese bank would provide a guarantee to the U.S. bank. Again, this kicks up the cost quite a bit, but when you win that seven-figure judgment, the U.S. bank pays it and then collects from the Chinese bank, who in turn goes after the breaching party in… China.
- Other U.S. parties who are beholden to the foreign party. Company XYZ in Oregon owes the foreign party an amount equal to half of the judgment. Yes, collect it, but if it’s written into the contract that you can seize those receipts, much easier to collect.
- Some other U.S. guarantor. Perhaps not specifically a Letter of Credit, but functionally similar. An affiliate of the foreign party, perhaps, who does have sufficient assets in the United States, offers collateral or other guarantee on the contract.
- Export Insurance. Just as Irvin and State Farm have me covered in case of a car accident or fire or other horrible event, export insurors have your client covered if their overseas buyer refuses to pay the balance due on a high-value shipment. If you don’t know who to contact, just Google “export insurance”. ** In truth, this isn’t really a judgment guarantee– it’s a deal guarantee. You wouldn’t even have to litigate in such a situation.
The list goes on. But the bottom line is this: a courtroom victory is Pyrrhic if there’s no way to collect on it. So make life easier on your client by providing some kind of assurance that they’ll be paid if the other guy breaches. Yes, it’s a pain in the neck. Yes, it can drive up the cost of contracting and thus drive up the cost of the entire relationship. But a judgment following a lawsuit is utterly worthless if it can’t be enforced. If the foreign party’s assets are all in a country that won’t recognize and enforce a U.S. judgment, litigating the matter is a massive waste of time.
* Set aside the fact that the transactional folks who write this agreement aren’t likely to litigate it, too.
** For a more personal touch, call my friend Dave Clark at ARI Global. He’s originally from Nebraska, but we don’t hold that against him, especially since he’s the fellow who introduced me to the concept of export insurance in the first place.