International Business Advisory – The Problem: Enforcing Your International Agreement

    By Charles V. McPhillips, International, Manufacturing & Distribution

    This Advisory identifies the problem. The next issue will identify the best solution.

    The problem is this: how can an American company enforce a sales agreement or other contract with a foreign counterpart who does not live up to its end of the bargain?

    The advantages of litigation in U.S. courts would seem obvious, at least to us Americans. It is much cheaper than dispatching witnesses and documents overseas. The rules and procedures are familiar. The language is English. And believe it or not, U.S. courts proceed much faster than most foreign courts do. The “home court advantage” is not so bad, either.

    The problem is that the visiting team has an entirely different perspective, and their “home courts” will often cheer them on. Unfortunately, the United States is not a party to any international convention requiring other countries to enforce U.S. court judgments. As a result, a foreign defendant without U.S. assets at risk may choose to skip an appearance in a U.S. court.

    Whether or not the foreign defendant contests the suit, the U.S. plaintiff could very possibly be awarded a judgment that ultimately proves worthless when it goes to enforce that judgment against the foreign assets of the judgment debtor. The challenge is to “domesticate” — or enforce — the U.S. court judgment, utilizing the machinery of a foreign court to collect payment from the judgment debtor in a jurisdiction where its assets are located.

    Foreign courts are consistently inconsistent in their approach to recognizing and enforcing U.S. court judgments. Many foreign judges are especially skeptical of “default judgments” rendered against their countries’ nationals in a U.S. court (i.e., where the foreign defendant fails to appear in the U.S. court proceeding).

    Foreign courts might be motivated to resist enforcing U.S. judgments for various reasons, including discomfort with the U.S. common law system. Civil law jurisdictions (such as found in France, Italy and Latin America) typically lack juries; do not permit lawyers to control witness examinations; are hostile to discovery requests; and generally adhere to detailed code provisions rather than rely on common-law court precedents.

    However, the legal basis most often cited by a foreign court to deny domestication of a U.S. judgment is that the U.S. court lacked personal jurisdiction over the non-U.S. party.

    A U.S. court will typically analyze whether a foreign defendant has had sufficient “minimum contacts” with the state in which the court sits in order to establish personal jurisdiction over such defendant. If the defendant availed itself of the privilege of doing business in that state, the U.S. court may conclude that it has personal jurisdiction over that defendant.

    However, foreign courts will often administer a much stricter test than “minimum contacts” in determining whether the U.S. court should have asserted personal jurisdiction over its local citizen or corporation. If that stricter test is not satisfied, then the U.S. plaintiff must essentially start all over in its quest to obtain judicial relief for the foreign defendant’s breach of contract.

    Whether or not personal jurisdiction would otherwise exist, the failure to serve “legal process” (i.e., formal lawsuit papers) on the non-U.S. party in accordance with the official procedure recognized under the laws of that party’s home country often proves fatal to the enforcement of a U.S. court judgment abroad. These foreign service-of-process requirements are often opaque and frustratingly bureaucratic. Some countries are overtly hostile to U.S. plaintiffs seeking to serve U.S.-issued legal process within their boundaries, viewing such an intrusion as an infringement on their sovereignty.

    The United States and many other countries are parties to the Hague Service Convention, which outlines a procedure, albeit bureaucratic and time consuming, for serving legal process on parties located outside the geographic jurisdiction of the court in which the suit has been filed.

    Now here is the “flipside” of the problem confronting a U.S. company seeking relief against a foreign company.

    If the foreign company becomes the aggressor, the U.S. company risks being sued in a far-away court, under foreign rules, administered by a judge speaking a foreign tongue. And if the American company loses in that foreign court, there is a substantial risk that U.S. courts will agree that personal jurisdiction was obtained over the American by the foreign court, resulting in enforcement of the foreign court judgment against the American company’s assets located here in the United States. Indeed, 31 U.S.-states (including Virginia) have enacted the Uniform Foreign Money-Judgments Recognition Act, stipulating the conditions under which their courts will locally enforce a foreign money judgment.

    One tactic for mitigating the problems described above would be to negotiate a choice-of-forum clause in the contract. Unfortunately, such clauses are often difficult to negotiate with foreign counterparts who have heard horror stories about U.S. courts, or who simply resist the prospect of transporting witnesses and themselves to play such a high-stakes “away game” in the United States. And many foreign courts are reluctant to enforce such clauses anyway.

    What is the “solution” to this enforcement dilemma? The answer will be revealed in our next International Business Advisory.

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    The answer will also be revealed in an informative one-hour webinar conducted by Chuck on Thursday, May 22, 2014 at 12:00 noon EDT. To register for the webinar, click here.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.