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Golden Rules for U.S. Investors to Follow in Dispute Resolution Negotiations with a Foreign State or State Entity

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What corporate counsel should know to negotiate a settlement with a host state.

10

Investors to Follow in Dispute Foreign State or State Entity

By Arif H. Ali and Baiju S. Vasani

Mr. Ali is co-chair of Crowell & Moring LLP’s International Dispute Resolution Group in

Washington, D.C. He is also an adjunct professor of law at

Georgetown University.

Mr. Vasani serves as counsel at Crowell & Moring LLP’s

International Dispute Resolution Group, resident in the Washington,

D.C. and London offices. Both authors have substantial

experience in negotiating and settling disputes with foreign

governments and state entities. More information about the

authors can be found at www.crowell.com.

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when a deal turns sour, the goal remains the same regardless of the country of incorporation— to settle the dispute on the best possible financial terms. (A sec- ondary goal might be to main- tain the ongoing business rela- tionship, but again, even the motivating factor underlying this goal is monetary.) For pub- l i c l y t r a d e d c o m p a n i e s , t h e financial goal is especially criti- cal because, at the end of the day, it is the bottom line and the all-important end-of-year ac- counts to shareholders that is the lodestar of their actions.

It would be inaccurate to say that government entities are not also motivated by financial ob- jectives to some extent. But when a foreign state entity is involved in a dispute with a private com- mercial enterprise, commercial considerations typically are not its primary interest. Gov- ernments have no shareholders. Their actions are more often influenced by national public policies, economic development goals, political objectives, lobbyists, non-governmental organizations (NGOs), multilateral institutional lending re- quirements, world trade issues, regional public policy, media reaction inside and outside of the country, and other such factors. All of the forego- ing could be sharply exacerbated during election years.

Foreign host governments have enormous power over the operations of foreign investments within their borders. To maximize the prospects for a successful negotiation of a dispute arising out of a foreign investment, U.S. corporate coun- sel should be aware of the following rules.

Rule 1: Know Thy Enemy The first things to understand are the formal

and informal ties that the entity with which the

U.S. company entered into a contract has to the state. It is also vital to understand the law governing the entity’s activities. With this information, corpo- rate counsel must determine whether the entity is legally, financially, and logistically inde- pendent from the state. This means understanding the “su- pervisory” relationships between those who run the entity and those who run the state itself.

If the contracting entity is not independent from the state, it may be more productive to ne- gotiate directly with the people who run the state—i.e., the offi- cials who are most likely have the final say on a possible settlement.

Negotiations between disput- ing private enterprises are, by and large, conducted against the

background of their commercial relationship. However, the relationship between a host state and a private investor, from the host govern- ment’s point of view, is not simply commercial. Thus, to negotiate effectively, the investor must first learn what makes the host government tick. It must acquire a sophisticated appreciation of the macro-political, economic and policy issues that are likely to condition the government’s negotiating stance. For example, the investor should try to ascertain what would convince the government to settle the dispute. What are the strongest points to emphasize in a meeting with government officials? What issues should the investor’s negotiators stay away from? The investor should investigate the legislative, execu- tive or other approvals that must be obtained for a settlement to take place. Also critical to learn is who within the host government will authorize the settlement.

Finding out this critical information before even approaching the government requires peo-

Never under- estimate the negotiating

skills of host government representa-

tives, especially those from the

so-called developing

world.

U nlike other generic writings on how to resolve business dis-putes, we offer 10 “golden rules” that U.S. corporate coun-sel should follow when they engage in settlement negotia- tions of an investment dispute with a foreign sovereign or state enti- ty. Negotiating with foreign governments can be challenging because they generally do not share the same objectives as private companies. Private enterprises are usually driven by one goal: making money. So

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ple “on the ground” who are in the know. This usually means retaining well-connected local legal counsel or government consultants in the host state’s jurisdiction to mine for information that might predict the government’s likely dis- pute resolution strategy.

Rule 2: Know Thy Law Many U.S. lawyers think about contracts only

within a common law construct, even those entered into with a party from a civil law jurisdic- tion. This bias can get a U.S. client into trouble.

Many commercial, construction and invest- ment contracts entered into with a foreign state or state entity are governed by the state’s local law. Not infrequently, these laws are based on civil law systems and cannot be interpreted using a com- mon law paradigm. For instance, the common law seeks to use only the “four corners” of the con- tract to determine the parties’ intent, while the civil law encourages the use of the parties’ negoti- ating history to interpret their intent. Also in the common law, the duty of good faith and fair deal- ing are, if anything, subsidiary implied terms of the contract. But in the civil law these concepts are an express part of the written civil code and play a front and center role in any contract inter- pretation. Similarly, under the common law, the theory of estoppel requires reasonable reliance by the affected party in order to come into operation. Under the civil law, reliance is not a strict requirement of estoppel theory (i.e., venire contra factum proprium non valet or doctrina de los actos pro- pios). Thus, dissonances that could affect the dis- pute—even those initially perceived to be minor—must be fully understood in order to resolve commercial or factual differences in a dis- pute with a host government.

A n i n v e s t o r i n a n o t h e r country’s jurisdiction should also understand how state sov- ereignty is interpreted in the host country. In certain older civil law systems, the principle of state sovereignty purports t o g r a n t t h e s t a t e c e r t a i n extraordinary rights, privileges a n d p o w e r s t h r o u g h a d - ministrative and public law principles. While newer laws may have been introduced in the jurisdiction to limit the state’s role in the nation’s economy and commerce, this does not mean that old-line bureaucrats and politicians have forgotten the ingrained

philosophy of state sovereignty. Therefore, U.S. corporate counsel should make sure that lawyers on the company’s negotiating team are versed in the common law and civil law systems, as well as in the host jurisdiction’s administrative law so that they can speak the host state’s legal language to government representatives and legal advisers.

Rule 3: Hold Your Horses A universal rule of statecraft is that govern-

ments move slowly. This puts a damper on the expectations of private enterprises (particularly U.S. companies) that expect to negotiate a settle- ment right away.

A state party can exploit the disharmony between the hare and the tortoise. All it has to do is slow down negotiations and take advantage of the short time left to negotiate a smaller settle- ment. A few savvy foreign governments have used this ploy to their advantage. They find out how long the arriving negotiators for the U.S. party plan to be in the host country. Usually, negotia- tors want to be back home with their families “by the weekend.” Accordingly, the government rep- resentatives fill up some of the weekdays with sightseeing and friendly, courtesy meetings with non-influential, lower-level government stew- ards. Eventually, often shortly before the nego- tiators are scheduled to leave for the airport, a negotiation session finally takes place with a high level official, who apologizes on account of ur- gent business, and then asks, “Do you think we can settle this now, or shall we resume on Mon- day?” Because their bosses are eager for immedi- ate results, the negotiators (who are not keen to stay the weekend) may be disposed to accept less favorable settlement terms just to get home with

something concrete in hand. The lesson here is not to

withhold travel information from foreign government offi- cials. It is that as much as company executives may de- sire a quick settlement, this is unlikely to occur. It will usual- ly take several trips to the host state over the course of a few months and frequent meetings with different host govern- ment officials (sometimes in the same ministry, most of whom will appear sympathetic but fail to take any positive steps). It may also require local lobbying efforts, the good offices of the local U.S. e m b a s s y , a n d p o s s i b l y t h e

In many countries, no government

official, no matter how senior, will be willing to make a decision to settle

an investment dispute for a

particular sum.

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commencement of international arbitration or a court proceeding to demonstrate a serious intent on the part of the investor, or to force the gov- ernment’s hand. (However, before doing so, please read Rule 9 below on playing the arbitra- tion/litigation card prudently.)

Settling an investment dispute with a host for- eign government requires immense patience on the part of a U.S. investor. And it is the need for patience that all corporate counsels would be wise to impart to their business clients no matter how loathe the clients are to hear it.

Rule 4: Underestimate at Your Peril Never underestimate the negotiating skills of

host government representatives, especially those from the so-called developing world.

Companies from industrialized nations tend to feel superior to governments of developing coun- tries. This is a mistake because in terms of raw negotiation technique and strategy, there is no disparity between the negotiators for the two parties. Negotiators from a developing country might even have a leg up because they grew up in a country with a tradition of bartering and nego- tiating stretching back centuries. Many are ex- perts at getting a favorable deal. Not only that, many negotiators outside the United States have degrees from leading colleges in the United States or Western Europe. In addition, they also have proved their survival skills by reaching the positions they hold.

An example that comes to mind occurred a few years ago. Representatives of a U.S. company and a host government of a Latin American country negotiated a $20 million dispute over four days, agreeing in principle to a settlement of $8 mil- lion. The parties agreed to come in the next morning to execute a written agreement. When the U.S. company’s representatives arrived at the government’s offices the next day, they were greeted by new government officials who in- formed them that “yesterday’s” government rep-

resentatives had “no authority” to conclude a deal. As a result, negotiations had to be com- menced all over again. With this ploy, the gov- ernment significantly lowered the ceiling on a settlement to less than $8 million. Within hours of the recommenced negotiations, the host gov- ernment proposed a $2 million settlement.

So corporate counsel should recall this story and always advise their business clients not to underestimate the guile of representatives from host governments and to be on the lookout for seemingly innocent tactics that are part of the host government’s negotiating strategy.

Rule 5: Only Negotiate with the Person Carrying the Checkbook and Pen

The foregoing anecdote demonstrates that it is not only prudent, it is essential for the U.S. in- vestor to find out whether the host government’s representatives in the negotiations have real authority to approve a settlement of the dispute and sign an agreement attesting to the settlement as an authorized government agent.

This is more difficult than it may at first ap- pear. In many countries, no government official, no matter how senior, will be willing to make a decision to settle an investment dispute for a par- ticular sum. Doing so can be politically risky. For example, if the administration changes hands, that official could be prosecuted for his or her role in settling a case with a foreign investor, leading to fines and even imprisonment. As a result, government officials often require a com- pelling justification that is likely to be accepted by both current and subsequent administrations before entering into a settlement agreement. Sometimes, it may be sufficient to have strategic pressure placed on the host state by U.S. trade representatives or consulate officials, or even by commencing an arbitration before the Inter- national Centre for Settlement of Investment Disputes. ICSID proceedings are public in that tribunal decisions are published. These decisions

As part of any concerted negotiation strategy, corporate counsel should develop with outside counsel

and the client’s consultants in the host country a concrete justification that the official ultimately

responsible for authorizing a settlement can use if his or her motives for settling are later called into question.

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are closely watched by investors, banks and mul- tilateral institutions. Hence, filing an ICSID ar- bitration against a host state could have a signifi- cant impact. Usually the host state will require “blood to be spilt”—for instance, the ICSID tri- bunal issues an interim award in favor of the U.S. investor on jurisdiction—before the government will agree to settle.

As part of any concerted negotiation strategy, U.S. corporate counsel should develop (with the assistance of outside counsel and the client’s con- sultants in the host country) a concrete justifica- tion that the host government official who is ulti- mately responsible for authorizing a settlement can use if if anyone later calls his or her motives for settling into question. Equally important, counsel should develop several face-saving ways that the government can settle, for example by offering a settlement that does not require a cash payment by the host country. Other examples include offering to accept future tax credits, goods in lieu of cash, or discounted energy, mineral or natural resources (e.g., petroleum, gas) from the host country.

Rule 6: Don’t Judge a Book by Its Cover Any basic guide to negotiation will underscore

the importance of empathizing and establishing a rapport with the opponent. With foreign govern- ments, however, this tends to be problematic. First, more often than not, there is a language difference. Second, there are cultural differences that could lead to stereotyping of both sides. Third, there usually is a strict hierarchy within a government that dictates who speaks to whom, who speaks first, and so on.

To overcome language difficulties, a U.S. in- vestor must include on its negotiating team one or two people who speak the host country’s lan- guage (not least to understand any internal whispering that may be going on during the negotiations). This is so even if the senior gov- ernment officials of the host country speak some English.

All of the U.S. negotiators must be very famil- iar with the culture, history, economics and poli- tics of the host country. A general perception of the region or sub-region as a whole is insufficient because countries within these areas are not the same. In addition, the negotiators must find a way to learn the appropriate hierarchy and the dance of negotiation in the host country.

These issues are not minor. An influential host country bureaucrat who perceives that a U.S. negotiator has not accorded him or her the prop- er respect can derail a negotiation before it be-

gins. This is so no matter how inadvertent the perceived slight.

Rule 7: Don’t Make Mountains Out of Molehills

U.S. corporate counsel must teach the compa- ny’s negotiators not to turn a small disagreement into a large-scale, bet-the-company dispute, or one in which important rights are surrendered in the negotiation process. The host state has unde- niable sovereign power over the investment oper- ations. If provoked, it can interfere with or even close down those operations in an instant. Thus, when there is a small dispute is not the time to use “fighting words” in negotiations. The lan- guage U.S. negotiators use and their diplomacy skills will be of vital importance in keeping a small dispute in proper perspective.

The first thing a U.S. investor should do when there is a confined dispute is to make sure that it has satisfied the host government’s “basic re- quirements.” This could mean having the neces- sary licenses, conforming to the host country’s regulations, paying required taxes, and the like.

Foreign governments usually seek to bargain for what they want. One example that comes to mind is an African country that had 15-year min- ing concessions with several foreign companies. With precious metal prices going through the roof, five years into the term, the government made public and private statements signaling its discontent with its percentage of the mining pro- ceeds from these concessions. Then, out of the blue, it placed an import tax on fuel from abroad, pursuant to what it described as a “World Bank initiative.” While many businesses were affected, the mining sector suffered the most since it was the most heavily dependent on foreign fuel. When the foreign investors sought to discuss eas- ing or eliminating the import tax with govern- ment officials, the government’s representatives asked for a quid pro quo for eliminating the import tax—a higher percentage of the mining proceeds.

Thus, corporate counsel should be aware of what is at stake and make sure the negotiators know that it is the company’s business agenda that must drive the negotiation process.

Rule 8: Timing Is Everything We have already noted that patience is a virtue

when dealing with foreign governments. But patience does not mean simply waiting for the government to come to you. (Most likely that will never happen anyway.) It means waiting for the right time to approach the government. The right time might be the start of a new administra- tion, or just after an award from an arbitral tribu-

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nal or a ruling from a court in favor of the company. A settle- ment can also be wrapped up into something much bigger, such as a free-trade agreement.

A bad time to approach a foreign government to negoti- ate the settlement of a dispute might be halfway into an elec- tion year (when governments generally refuse to take any steps that could be publicly criticized), or when opposition or third parties are at their strongest and most vociferous. Another bad time might be just after an arbitral award or court ruling in favor of the govern- ment.

It is no overstatement to sug- gest that, when dealing with governments, getting the timing right can mean the difference between a settlement and no agreement at all.

Rule 9: To Arbitrate or Not to Arbitrate? With the global rise in the cost of oil and gas,

energy and other natural resources, governments where these resources are located have become emboldened to make unilateral (and unlawful) alterations to resource-related contracts and licensing agreements, whether with national or large multinational corporations. Many of these resources were “nationalized” (i.e., forcibly taken) during the 1960s and 1970s and privatized again during the 1980s and 1990s. Today there is re- newed concern that these industries will be rena- tionalized again. (In certain countries, such as Venezuela and Zimbabwe, this is already occur- ring.)

When a dispute arises out of an investment in a country rich in natural resources, the host gov- ernment enjoys tremendous leverage over foreign investors, no matter what the nature of the in- vestment. In this situation, the only leverage the investor may have is to threaten to arbitrate the dispute—whether under a bilateral investment treaty, a stabilization agreement, or an arbitration clause in the contract. Sometimes this strategy can provoke a settlement.

But the threat of coercion could backfire if the host state is intent on its course no matter what. Rather than bring the host country to the table, threats might provoke the host government to blacklist the investor from future projects and also bring current ongoing business operations in

the host country to an end. I n t h e s e c i r c u m s t a n c e s ,

unless the big picture strategy is to exit the host country alto- gether, the only option could be to accept the host govern- ment’s new terms in order to maintain a foothold there. One of the greatest challenges cor- porate and outside counsel face today, is to advise their business clients when to fight and when to stick.

Rule 10: Make It Watertight Even when a settlement is

reached, it is only as good as the paper it’s written on. That means the settlement agree- ment must be watertight and, above all, it must conform to local law and custom. Thus, corporate counsel must find out whether the agreement must be notarized, approved by a legislature or a local court (or both), be signed by the

requisite number of signatories with authority on behalf of the government to bind it to the con- tract, and be witnessed by the proper number of witnesses.

After all, even if the signature on a settlement agreement is penned by the Prime Minister her- self, local law may still require an internal gov- ernmental resolution without which the govern- ment cannot be bound.

Finally, U.S. corporate counsel must ensure that certain key clauses are included in the settle- ment agreement. Especially important are clauses in which the government represents and warrants that it has the requisite authority to enter into the settlement, and that it renounces any claim to sovereignty or public policy in order to try and render the settlement agreement null and void at a later date. The settlement agreement also should contain an arbitration clause, and a provi- sion stating that the government agrees to be bound by the arbitration clause.

Conclusion Settling a protracted or impassioned dispute is

difficult in the best of times. When the dispute is with a foreign state or a state-owned entity the difficulty is exponentially increased. But as these rules suggest, having the right advisors, the right information and the right attitude can result in a commercially acceptable settlement. n

It is no over- statement to suggest that, when dealing with govern-

ments, getting the timing

right can mean the difference

between a settlement

and no agree- ment at all.