Reducing Risks Of Operating In Conflict Zones Through Better Contract Drafting

The legal landscape for companies operating in countries in conflict or transitioning from conflict is challenging and risky.
United States Government, Public Sector

The legal landscape for companies operating in countries in conflict or transitioning from conflict is challenging and risky. Security contractors and construction and logistics companies, among others, play a critical support role for military forces, international institutions, aid organizations and local governments. While many conflict areas offer lucrative business opportunities, the challenges of working in these environments are myriad and include risks posed by war, local and international legal issues, and financial matters, and also involve increased operational costs.

While the risks are high, the financial benefit to U.S. companies expanding their businesses abroad can be immense. Government funds, international donor funding and private capital pour into conflict and post-conflict countries to support development and security goals. Many medium-sized companies have the capability to perform these contracts but lack the know-how to assess the accompanying risks. As a result, large companies often win contracts with little competition. Understanding and managing risk can help small to medium-sized enterprises participate in these challenging, but rewarding, markets.

LEGAL ENVIRONMENT

While criminal liability is often cited as the primary threat to U.S. businesses — for example liability under the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 — most corporations view civil liability as the more common and dangerous threat to the corporate bottom line. Over the past few years, American, host country national and international criminal laws have slowly and imperfectly caught up with jurisdictional and substantive legal issues surrounding foreign business interests in conflict zones. However, questions of civil liability and civil jurisdiction continue to trouble U.S. courts, American and foreign plaintiffs, and U.S. companies themselves.

As military deployments slow down in a conflict zone, the importance of having private industry "pick up the slack" to support continued U.S. and international reconstruction operations grows, along with increased civil liability and corporate and tax risks.

Businesses must find a way to operate in countries designated as "failed states," "lawless" or "under occupation" or that have transitional governments with uncertain legal systems. Navigating legal issues in the conflict or post-conflict country is only half the battle. Recent legislation and court judgments, including those involving enforcement of the Alien Tort Claims Act, 28 U.S.C. § 1350, have opened the door to civil suits by foreign parties that never before had access to U.S. courts.

Additionally, in many places, including Afghanistan, foreign companies must have a host country partner and a local bank account. These requirements create numerous business challenges, but importantly, they also expose U.S. companies to civil and criminal liability under the FCPA for the actions committed by their foreign partners, even if they have no involvement in, or knowledge of, the illegal behavior. The fact that fragile, transitional countries tend to have high levels of government bribery makes this a common scenario. Conflict and post-conflict countries such as Afghanistan, Iraq, Somalia, Sudan, Libya, Syria and the Congo receive the lowest marks in Transparency International's Corruption Perceptions Index.

As a result, U.S. companies operating over-seas are confronted with potential liability and skyrocketing insurance premiums. They are designing corporate liability and threat-mitigation strategies, such as reincorporating offshore and moving assets to safer international destinations such as the British Virgin Islands. Yet these are imperfect strategies, as many companies must maintain robust presences in the United States or in a host Western country in order to compete for contracts. Additionally, medium-sized businesses do not have the resources to pursue many of these strategies.

CONTRACT DRAFTING SOLUTIONS AND PRACTICE TIPS

Whether you are a U.S. company with established international operations or considering expansion, here are some mitigation strategies to contemplate before doing business in conflict and transitional societies.

  • Develop a comprehensive compliance program to address the broad panoply of ethics and compliance issues faced when working abroad. For instance, to address the FCPA, have a robust policy that includes signed certificates from foreign partners indicating their knowledge of and compliance with the statute and other anti-corruption laws.
  • Include robust termination clauses in all contracts to provide a safe "out" for your company. Be sure to address the rights of the parties in the event of increased security concerns.
  • Vet potential subcontractors and carefully craft dispute resolution clauses, choice-of-law provisions and forum-selection clauses.
  • Know your customers and your customers' customers. Several federal sanctions enforced by the Treasury Department's Office of Foreign Assets Control may apply to your company if any of your products or services end up in the wrong hands.
  • Negotiate employee contracts to control potential disputes. Consult attorneys to craft employment contracts that address local laws and risks, generally, that exist when operating in conflict zones and develop contingency plans in case the security situation worsens.
  • Develop a sound financial method for capturing and repatriating money. Currency and conversion risk must also be managed carefully. Countries in conflict usually have fluctuating currency rates that can significantly affect company bottom lines.
  • Know the risks and pitfalls associated with contracts that require surety deposits or require your company to keep funds in a joint bank account located in the host country.
  • Extend indemnification clauses. If possible, expand your company's indemnity so that any legal actions arising from conduct in the host country are covered by your partner and not you.
  • Study the basic contract law of the host country. Even with favorable forum-selection clauses and choice-of-law provisions, parties may still be able to apply prejudicial host country law or file claims against you in local courts. Additionally, many local laws related to tax, finance and physical security could apply to your company regardless of your contract provisions. Considering that sudden political changes are common in these countries, try to organize your revenue flow while knowing that the host country could adversely seize or garnish your in-country assets.
  • Understand any specific U.S. laws that apply to your industry. For example, if your business deals at all with the manufacture or trade of products that use minerals originating from conflict zones, you may be subject to specific reporting laws.
  • Start early in developing relationships on the ground with local officials and legal resources in the host country so that when a dispute arises, you have relationships to access.
  • Take special care to protect your products if your business deals with intellectual property. Intellectual property laws in many countries tend to be inadequately enforced. Foreign governments may be interested in securing your intellectual property in order to sell it to domestic companies.

SOLVING PROBLEMS WITHOUT LITIGATING

It is one thing to ensure that all of your contracts have adequate protections, but it is another to have the time and funding to enforce your rights. Without the resources to take disputes to court, many companies end up relinquishing their contractual rights. While this is a difficult challenge, there are some possible solutions.

One way to avoid litigation but still enforce your contractual rights is to include arbitration provisions in your contracts. It is important to draft these provisions carefully and consider where and how arbitration will be pursued in the event of a dispute. There are several respected international commercial arbitration courts throughout the world that could be a good option for your business. These arbitrators can be better equipped to deal with international disputes and conflicting laws than arbitrators from a host country.

However, arbitration is not a perfect solution. It can become as expensive and as time-consuming as litigation. More concerning is the fact that any and all evidence can be presented to the arbitrator. Parties have immense latitude to present incorrect or misleading information to the arbitrator, resulting in the mishandling of your legal claims.

The best way to solve problems without litigating or submitting to arbitration is for parties to account for potential disputes in advance and devise workable and efficient processes to deal with these disputes on a rolling basis. The contract can provide for specific steps to be taken in the event of a dispute and put certain officers in charge of communicating with the other party. During the negotiation phase, the parties should have a frank dialogue on expectations and consider detailing them in writing to avoid misunderstandings. At the beginning of business relationships, parties are optimistic and want to keep positive relations in order to close a deal. Addressing potential disputes at this stage is challenging because parties do not want to impede negotiations. However, dealing with these issues up front shows a sophisticated business perspective that some parties may appreciate and respect, and it will certainly protect your company in the future.

U.S. businesses can safely compete in these lucrative marketplaces by negotiating issues up front and incorporating some of the solutions mentioned above before deploying resources abroad.

Previously published in Westlaw Journal on May 28, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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