- Sovereign Litigation in Latin America: Top Five Issues To Think of When Doing Business With a Latin American Country
- August 28, 2014 | Authors: Juan C. Castañeda; Alejandro E. Moreno; Neil A.F. Popović
- Law Firms: Sheppard, Mullin, Richter & Hampton LLP - San Diego Office ; Sheppard, Mullin, Richter & Hampton LLP - San Diego Office ; Sheppard, Mullin, Richter & Hampton LLP - San Francisco Office
“We are in the soup” exclaimed, federal judge Thomas Griesa, referring to Argentina allegedly defaulting on its sovereign bonds. And so we are.
According to bondholders, on July 30 of 2014, Argentina defaulted on its sovereign debt for the eighth time in its history. That a developing nation is accused of defaulting on its international debt might not warrant legal headlines, but in this case the “soup” was precipitated by a court order from Judge Griesa, of the Southern District of New York. Judge Griesa is presiding over litigation brought by Argentina’s “hold-out” bondholders, including hedge funds who refused to restructure their bonds after Argentina’s previous bond default in 2001, and chose instead to pursue judicial relief.
The hold-outs’ litigation against Argentina is but the latest prominent example of how Latin American countries and the companies that do business with them can become embroiled in international commercial litigation and arbitration—often involving considerable time and expense that were not factored into underlying business decisions. Judicial actions involving a Latin American country can arise from many international business activities:
• privatizations and initial public offerings;
• sovereign bond issues;
• debt restructurings;
• construction projects;
• international trade issues;
• project finance and infrastructure development; and
• public private partnerships.
Despite the wide variety of ways in which businesses and Latin American countries can become involved in international litigation, there are several common questions every company, business owner or counsel advising such companies should evaluate prior to doing business with a Latin American country. Latin American governments doing business with foreign companies should also consider these factors.
Can a Private Party Sue a Foreign Sovereign in U.S. Court?
If a U.S. forum is available, it is often, but not always preferable for a U.S. party. However, there are certain gateway issues that a claimant must consider before filing suit in the U.S. To proceed with a lawsuit against a Latin American country in the U.S., the claimant must comply with the Foreign Sovereign Immunities Act (“FSIA”), which provides the sole basis to sue a foreign sovereign in the U.S. Generally, if a foreign defendant qualifies as a “foreign state” under the FSIA, the Act provides that it shall be immune to suit in any U.S. Court—federal or state—unless a statutory exception to immunity applies. The most common exceptions are: (i) when the sovereign waives immunity or agrees to submit a dispute to arbitration, (ii) engages in a commercial activity and the lawsuit arises from such activity, (iii) commits a tort in the United States; or (iv) expropriates property in violation of international law.
Perhaps the most important exception to the FSIA is the commercial activity exception. To determine whether a sovereign’s activities are commercial, and thus subject to litigation in the U.S., the FSIA requires courts to look to the nature of the act itself, rather than the purpose for which the sovereign is engaged in the act. The commercial activity itself may occur in the United States or somewhere else, but if the commercial activity occurs outside the United States, it must have a direct effect on the United States.
What if the Fight Has to Take Place On Foreign Sovereign Turf?
Sometimes, a U.S. forum is not available (e.g., as a result of a forum selection clause), or it might make sense to litigate overseas (e.g., the substantive law is favorable or witnesses are more accessible). Historically, parts of Latin America have sometimes been perceived as hostile environments for foreign parties to engage in international dispute resolution due to purportedly unreliable courts, lax evidentiary standards, the difficulty of enforcing judgments, and the perception of corruption in the adjudicating tribunal. Although many Latin American countries have ratified international conventions on international arbitration and judicial assistance, there has been a backlash in countries such as Venezuela and Bolivia.
If a private party has legitimate concerns that it cannot receive a fair trial in the home court system of a foreign sovereign, it may try to force the dispute into an alternative forum perceived as more neutral—either a different court system or, where feasible, international arbitration. No party, private or sovereign, should agree to litigate in an obviously biased forum with the hope that if things turn out badly it can avoid recognition or enforcement by invoking bias after the fact. Avoid this advice at your own peril.
For example, in February 2011, after Chevron successfully moved to dismiss litigation in the U.S. in favor of proceeding in Ecuador, an Ecuadorian court ordered Chevron to pay $8 billion in compensation in connection with ecological problems arising from the development of the Lago Agrio oil field in Ecuador. Chevron subsequently convinced a U.S. court that the verdict was obtained through coercion, bribery, money laundering and other misconduct, although that decision (in a collateral proceeding) is on appeal in the United States Court of Appeals for the Second Circuit .
Where is the Evidence?
A claim involving a sovereign party is likely to raise problems with access to witnesses and evidence. Before commencing litigation, a party involved in such an international dispute should create a game plan identifying key witnesses and evidence necessary to proceed with (or defend) the claim. If evidence is likely to be inaccessible, the parties should proactively consider whether alternatives exist. One strategy is to begin gathering information and evidence before initiating the litigation. In addition, U.S. law, foreign law and international law provide mechanisms for gathering evidence across borders, although such procedures can add time, expense and uncertainty to the dispute resolution process.
How Much Will It Cost?
Any litigation can be expensive - hiring counsel, undertaking the relevant factual and legal investigations, and preparing a complex case for trial or arbitration can easily cost hundreds of thousands of dollars, if not millions. Litigation in Latin America or involving Latin American parties (sovereign or otherwise) may entail additional expenses. Any litigation budget should consider expenses such as the cost of service of process overseas, certified legal translators and interpreters, travel expenses, local counsel, and the fees paid to an arbitral tribunal. Also, the savvy practitioner should be aware that different regimes may make it harder or easier to recover the cost of the proceedings themselves, including attorneys’ fees awarded to a prevailing party. In some cases, a claimant may have to advance the other side’s share of expenses as a prerequisite even to having its claims heard.
How Will I Collect On a Judgment?
Even if you are able to obtain an award from a U.S. court or another neutral forum, the losing party may resist recognition and enforcement of a judgment (or arbitration award), either where it was issued or wherever the prevailing party seeks enforcement. Although there are several widely ratified treaties that address recognition and enforcement of foreign arbitral awards, there is no equivalent international agreement regarding foreign judgments. The law regarding foreign judgments varies from country to country, and in some countries it may be difficult to obtain recognition of an award or judgment against the local sovereign. Enforcement can be difficult as well, because many sovereigns and private companies take great care to maintain their assets in forms and locations intended to protect them from attachment, including via corporate instrumentalities that have distinct legal personalities. A claimant should be prepared to dig in for the long haul and opportunistically enforce the judgment wherever there is an opportunity.
The foregoing considerations are important for private parties and sovereign governments alike, and they may lead to radically different litigation strategies depending on the circumstances of a particular dispute. The most important decision a claimant (or party facing a claim) can make is to hire experienced counsel who not only understands how to proceed with litigation involving a sovereign, but can also navigate the various cultural and language issues that are likely to play a part in any sovereign litigation.