Risks of arbitration

Barring any compromise agreement, another multibillion-peso infrastructure project of the country involving a foreign company is expected to go to arbitration.

President Aquino has served notice of his intention to cancel the P11.8-billion contract entered into by the past administration for the construction of 72 roll-on, roll-off ports in different parts of the country.

Citing overprice and incongruence with local conditions as justification, only six of the planned ports are set to be implemented. Not surprisingly, the French consortium that won the contract protested the action and threatened to sue the government for breach of contract.

It is standard practice in contracts whose parties come from different countries to provide for arbitration as the means to resolve any conflict in the interpretation or implementation of their agreement.

To ensure fair play, the arbitration proceedings are, as a rule, conducted in a place other than the countries of the contracting parties.

In our region, Hong Kong and Singapore are the usual venues for arbitration. In Europe, it’s England and the Netherlands. The high level of commercial development in these countries has given them the edge in expertise and experience in the resolution of contractual disputes.

Procedures

Regardless of where it is conducted, international arbitration can be very expensive.

The arbitration fees, which include the costs of filing, honoraria for the arbitrators, deposit for contingent expenses, depend, among others, on the nature of the case, the amount involved and possible impact of the decision on similar disputes in the future.

In addition, provisions have to be made for the fees and expenses of the foreign and local lawyers who will handle the case. The services of foreign lawyers who specialize in commercial arbitration cases do not come cheap.

Sometimes, they even charge to the client their parking fees and food chits during the proceedings and overtime work of their support staff!

The rule of the thumb when a party enters into international arbitration is, your war chest must be full. The possible gains from arbitration should far outweigh all the troubles of going through it.

Pyrrhic victory is not uncommon in international arbitration cases. After counting the financial cost of the time and efforts spent in the proceedings and the bills of the lawyers, accountants and other professionals involved, the arbitration award may not even be enough to reimburse the expenses incurred.

Last resort

Suing a foreign government or forcing it to go to arbitration is considered a remedy of last resort. It is something foreign companies will try to avoid at all costs, even if it means losing some of the profits they expected to earn from the botched transaction.

The strategic looking businessmen will not, as much as possible, burn his bridges with his clients, no matter how obnoxious they may be. The bankrupt customer today may be the Henry Sy of tomorrow whose favor the businessman would gladly give an arm and a leg to get.

When a company sues a foreign government or its instrumentalities for breach of contract, it runs the risk, especially if it wins, of being “blacklisted” by the latter for future business transactions.

The blackballing, for obvious reasons, will not be made public; in fact, it will be denied if it spreads in the grapevine. The word will instead be spread quietly among the offices with whom the company or any of its subsidiaries may have some business to transact with in the future.

The story is told that in the 1980s, when the country was on the throes of a serious financial crisis that necessitated the restructuring of our foreign debts, some foreign bankers demanded concessions that threatened to derail the signing of an agreement.

Invoking their fiduciary duty to shareholders, the holdouts ignored the adverse effects of a Philippine default in case the deal is not closed immediately.

Consequences

A subtle warning was sent to the recalcitrant banks, through their local representatives, that if they persist with their action they will never be able to do business again in the country.

Faced with the prospect of being left out when the country gets back on its feet (as it eventually did), they grudgingly signed on the restructuring arrangement agreed to by the majority of the banks.

Fast forward to later years, according to the grapevine, it took two administration changes before the calls of the representatives of those banks were returned by the government officials with whom they tried to forge investment deals.

No doubt, the French consortium that is threatening to sue the Philippine government if it scuttles the roll-on, roll-off ports project is aware of the consequences of its action, regardless of the way it ends.

Although legalities will play a significant role in the resolution of the case, arbitration cases are not decided solely on legal issues. The arbitration panel can go beyond the documentary evidence and examine the facts and circumstances behind the cancellation of the contract.

When graft attends the negotiation and conclusion of a contract, or its terms and conditions are unduly onerous to one of the parties, or supervening events render some of its provisions unrealistic, there is sufficient justification for it to be cancelled or modified.

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