Reducing Risks Of Operating In Conflict Zones Through Better Contract Drafting – Mondaq News Alerts (registration)

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.