Effective risk mitigation in cross-border deals: Arbitration

Risk mitigation is an essential element of any cross-border deal or investment. Aside from addressing regulatory and compliance issues and ensuring local law requirements are met, this includes planning an effective dispute resolution mechanism, which is often based on arbitration.

In addition to ensuring a well-drafted dispute resolution clause in the contract, it is also important that parties to cross-border deals consider at the outset whether their investments can and should be structured to benefit from the protection offered by international investment treaties.

In this regard, arbitration is a crucial component when planning and managing cross-border deals. There are two main points to consider: (1) a well-drafted arbitration clause; and (2) investment treaty planning.

Arbitration Clauses

Arbitration is increasingly becoming the dispute resolution mechanism of choice for international or cross-border deals projects, including in the energy, telecommunications, technology and infrastructure sectors.

Commercial parties value the confidentiality and procedural flexibility of arbitration proceedings, including the opportunity of having a say in the composition of the arbitral tribunal. Many prefer not to risk litigating a dispute in the national courts of the other party, and prefer the perceived neutrality and efficiency of arbitral forums. Another significant draw is the ease of enforcing arbitration award overseas under the New York Convention regime.

Unlike litigation, arbitration is a consensual process. It is therefore critical that the parties give proper consideration to drafting the arbitration agreement, to ensure it is binding and effective. The agreement is often a clause within the main contract between the parties and we can help ensure that the agreement is drafted robustly and covers all key bases.

Investing additional time in a well-drafted arbitration agreement at the outset can pay significant dividends later on and result in a smooth and efficient procedure if a dispute arises. A streamlined process can allow the parties to resolve disagreements quickly and continue their working relationship, or at least move on with other commercial matters.

On the other side of the coin, a poorly drafted arbitration agreement with minimal if any consideration at the stage at which the contract is finalised risks incurring significant cost and delay.  An obstructive opponent is likely to exploit gaps or ambiguities in the arbitration agreement, giving rise to satellite litigation that will derail and delay any claim. For example, if the parties agree to seat the arbitration in a poorly chosen jurisdiction, a challenge to the scope or validity of the arbitration agreement in the national courts can take years to resolve.

Investment Treaty Planning

It is important to consider when a deal is put together whether it can be structured to maximise the protections offered by investment treaties. Once a dispute has arisen, it is usually too late.

An investment treaty is a treaty between two or more states, who agree certain rules for the protection of investments made in their territory by nationals of the other contracting state.  A very wide variety of investments may be covered, including bonds, real estate, shareholdings, infrastructure investments and more. 

Such treaties typically require the host state to observe various standards of protection.  Such standards include protection against expropriation, guarantees of fair and equitable treatment and non-discrimination. 

Any state action that breaches those standards – such as unfair or retrospective taxes, detrimental changes in regulations, non-renewal of licenses or concessions and more –may allow the affected investor to bring a claim directly against the host state.  Such claims are typically decided by arbitration.  

There is a network of thousands of investment treaties between different countries around the world.  Given the wide range of cross-border investments protected, and the increasingly globalised nature of commerce, these protections are particularly valuable to parties keen to mitigate the risk of investing in a project in another jurisdiction.

Be Prepared

We can provide parties considering a valuable cross-border investment or deal with specialist legal advice regarding the most effective deal structure and dispute resolution model to protect their investment and mitigate their risk in the event of a future dispute.