Opinions of Counsel in Cross-Border Financial Transactions

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Opinions of Counsel in Cross-Border Financial Transactions Reconciling U.S. Customary Practice with Non-U.S. Expectations; Assumptions & Qualications to Avoid Misunderstanding and Undue Risk WEDNESDAY, SEPTEMBER 20, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: J. Truman Bidwell, Jr., Partner, Sullivan & Worcester, New York Ettore A. Santucci, Partner, Goodwin Procter, Boston & New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Legal Opinions in Cross-Border Transactions

6 Who We Are Ettore A. Santucci Partner Goodwin Procter LLP 100 Northern Avenue Boston, Massachusetts J. Truman Bidwell, Jr. Partner Sullivan & Worcester LLP 1633 Broadway New York, New York /15/2017 6

7 To Put This Presentation in Context In 2016 the ABA Legal Opinions Committee published a report on Cross-Border Closing Opinions of U.S. Counsel (the ABA Report ) with its primary focus on third-party closing opinions of U.S. lawyers on matters of U.S. law to non-u.s. parties in cross-border transactions ( outbound opinions ) governed by non-u.s. law. The ABA Report was a response to the fact that transactions across country borders have grown at a staggering rate, and the issuance of opinions in these transactions has grown apace. A similar phenomenon is occurring in the issuance of opinions on US law to foreign clients who are engaging in international transactions with US or international parties. While these differ from the third party opinions covered by the ABA Report, they are often similar in scope and substance. 9/15/2017 7

8 Because outbound opinions can only cover U.S. federal law and the law of a specified U.S. state (or states), not the law of the foreign country whose law governs the agreement, they do not include the valid, binding and enforceable opinion, which is the centerpiece of third-party opinions in U.S. domestic transactions. An outbound opinion is, instead, based on an assumption (preferably an express one) that, under the law of the non-u.s. country whose law has been chosen to govern, the agreement is valid, binding and enforceable under the governing non-u.s. law (the so-called Omnibus Cross-Border Assumption ). 9/15/2017 8

9 The absence of a shared conceptual framework between U.S. opinion givers, on the one hand, and non-u.s. opinion recipients and their counsel, on the other, can give rise to misunderstandings, which often are compounded by differences in legal systems, legal education and practice, language barriers (even when documents are in English or are translated into English). 9/15/2017 9

10 As noted, the giving and receiving of third party opinions in the international context creates unique obstacles. The purpose of this webinar is to consider the most commonly encountered obstacles and to suggest ways of dealing with them. 9/15/

11 Let us start with the Omnibus Cross-Border Assumption As noted, the ABA Report confines itself to transactions where the choice of law for the documentation is the law of a foreign jurisdiction. Therefore, assumptions as to the binding nature of the transaction documents, choice of law and procedural rules are all required. Sample language from the ABA Report: We have assumed that the choice of the law of [FOREIGN COUNTRY] in the Agreement is valid and the Agreement and each of its provisions are valid, binding and enforceable under the law of [FOREIGN COUNTRY] and of any other jurisdiction whose law applies, other than law covered expressly in an opinion included in this opinion letter. [IF THE AGREEMENT CONTAINS A FORUM SELECTION CLAUSE, ADD -- We also have assumed that, other than the courts of [COVERED LAW STATE] and United States federal courts, any court named in the forum selection clause of the Agreement will have jurisdiction over the parties and the subject matter of any action brought in that court under the Agreement.] 9/15/

12 Omnibus Cross-Border Assumption The assumption could be complemented by other elements that, while not as necessary, can be important in a particular context: A. Non-U.S. entities were duly formed and the agreement was duly authorized by them; B. The agreement has been duly executed and delivered under all non-u.s. laws that may apply; C. There are no non-u.s. laws that render execution, delivery or performance of the agreement unlawful illegal. 9/15/

13 Role of Customary Practice As we all know, third party legal opinions in the United States incorporate, whether specifically or not, US customary practice. This is made possible because, in large part, we share a common legal system and our practices tend to be similar. A. As in domestic practice, U.S. lawyers giving outbound opinions necessarily base them on U.S. customary practice. However, the reliance on customary practice can create uncertainties in international transactions and imposes an obligation on both the opinion giver and the recipient. Opinion givers need to have heightened sensitivity to the greater risk of misunderstanding with an eye to promoting clarity. Opinion recipients need to know that, if they do not have sufficient familiarity with U.S. customary practice, they will need U.S. counsel to guide them. 9/15/

14 Role of Customary Practice B. The reliance on U.S. customary practice is necessary because opinion givers cannot ascertain practice in recipients non-u.s. jurisdictions. C. It is a corollary of this reliance that opinion givers have no responsibility to advise recipients on the scope or meaning of the opinions they are giving. While a foreign recipient and the counsel may not have familiarity with the concept of customary practice, as we know, many jurisdictions have similar concepts; in fact a Dutch lawyer recently published a book on the use of the concept in Dutch law. In any event, customary practice is at the core of our legal opinion system and hence the issuers reliance should be spelled out. 9/15/

15 Role of Customary Practice The ABA Report provides two examples of sample language: Alternative 1: This opinion letter shall be interpreted in accordance with the Legal Opinion Principles prepared by the Legal Opinions Committee of the American Bar Association s Business Law Section as published in 53 BUS. LAW. 831 (1998) [, a copy of which is attached to this opinion letter]. Alternative 2: This opinion letter shall be interpreted in accordance with the customary practice of United States lawyers who regularly give, and lawyers who regularly advise recipients regarding, opinions of the kind included in this opinion letter. 9/15/

16 The Golden Rule and Other Rules of Engagement US third party opinion practice arose from the adoption of the Golden Rule, first laid out by Jim Fuld in the early 1970s. A. The core of the Golden Rule is that an opinion should not be requested that counsel for the opinion recipient would not give if that counsel were representing the other party and had the requisite expertise and that a recipient should not be denied an opinion that lawyers experienced in the matters under consideration would commonly render in comparable situations. B. The Golden Rule also requires that parties and their counsel act fairly and cooperatively issuing and receiving opinions is not a win/lose game; it is an exercise in professionalism. 9/15/

17 The Golden Rule and Other Rules of Engagement C. The ABA Report puts forward suggested rules of engagement that can complement the Golden Rule when U.S. and non-u.s. lawyers discuss third-party closing opinions. D. A report issued by the city of London Law Society has since cited with approval the ABA Report s approach. 9/15/

18 Specific Opinion Requests The ABA Report discussed opinion requests common in domestic transactions and then considers them in the context of cross-border transactions. It also provides suggested opinion language. 9/15/

19 Choice of Law Outbound opinion recipients often wish to receive an opinion that the choice of the foreign law to govern the transaction documents is valid. The ABA Report s suggested language for such an opinion is: Under the law of [COVERED LAW STATE], the choice of the law of [FOREIGN COUNTRY] in the Agreement is valid except to the extent that giving effect to the law of [FOREIGN COUNTRY] would violate a fundamental policy of (i) the jurisdiction whose law is covered by this opinion letter or (ii) any other jurisdiction having a materially greater interest than [FOREIGN COUNTRY] in the determination of the issue, if the law of that jurisdiction would apply to the Agreement or any of its provisions in the absence of a governing law clause. 9/15/

20 Choice of Law A. Note that a number of states have statutes addressing choice of law but do not apply to outbound choice of law. Others do give effect to an agreement s choice of another state s (and therefore another country s) law if specific conditions are met. B. However, the sample language is designed to cover agreements that choose non-u.s. law as their governing law based on the application of the Restatement Second of Conflict Laws ( 187). C. 187(2) of the Restatement has a two-pronged test: 1. Whether there is a sufficient relationship between the parties or the transaction and the chosen law jurisdiction; and 2. Whether application of the chosen law would be contrary to a fundamental policy of the jurisdiction whose law would have applied in the absence of a choice-of-law clause and that jurisdiction has a greater interest in the issues (the default state). 9/15/

21 Choice of Law D. In the domestic context, applying the second prong of the Restatement test is difficult see the TriBar Supplemental Choice of Law Report which describes in detail how practice differs in U.S. domestic practice when choice-of-law opinions are requested and given: 1. Some opinion givers rely on the coverage limitation; 2. Some bar reports (e.g. California) state that the opinion does not cover the second prong of the Restatement test; 3. Some opinion givers prefer to make it clear that they are not covering the second prong and do so in a variety of ways. 9/15/

22 Choice of Law E. It is even harder to apply the second prong of the Restatement test in cross-border transactions because: 1. Determining which is the default state or country is more difficult; 2. The opinion giver does not know how application of the chosen non-u.s. law to a given issue would be treated; 3. Many U.S. lawyers are not in a position to determine which policies of the covered law state are fundamental. 4. Non-U.S. statutes may supply terms that do not appear in the agreement; 5. Terms may have no counterpart in U.S. law; 9/15/

23 Choice of Law F. The ABA Report concludes that giving choice-of-law opinions in cross-border transactions is possible when the opinion giver is not receiving a remedies opinion. G. However, the challenges of covering the second prong of the Restatement test are such that, regardless of how the opinion giver feels about that issue in domestic practice, the ABA Report recommends that the opinion expressly state that it does not cover the fundamental policies of any jurisdiction, including those of the covered law state. 9/15/

24 As If Enforceability Opinions A. As a matter of convenience, in U.S. domestic transactions lawyers from one state can be asked to give an enforceability opinion on agreements governed by the law of another state as if the law covered by the opinion were the governing law. B. The ABA Report endorses the practice of U.S. lawyers not to give as if enforceability opinions in cross-border transactions when the chosen law is the law of a non-u.s. jurisdiction. 9/15/

25 As If Enforceability Opinions C. The core logic of the as-if opinion breaks down in a cross-border transaction: 1. The opinion giver cannot predict how courts of the state whose law is covered by an opinion might interpret a foreign-law agreement under the law of the covered law state; 2. Non-U.S. legal concepts and/or terminology may have no counterpart in U.S. law; 3. Provisions that do not appear in the agreement at all, such as so-called non-derogable norms in civil law countries, may be among the most material terms, but the opinion preparers cannot be expected to be aware of them; 4. A U.S. court can be expected to apply the chosen non-u.s. law based on expert testimony, rather than pretending that the agreement is governed by U.S. law which is what the preparers of an as if opinion would have to do. 9/15/

26 No-violation of Statutes, Rules or Regulations A. Under U.S. customary Practice, a no violation of law opinion does not cover all statutes, rules and regulations of the Covered Law; rather: 1. The opinion is understood to cover only statutes, rules and regulations that a lawyer in the covered law state exercising customary professional diligence would reasonably be expected to recognize as being applicable to the entity, transaction or agreement to which the opinion relates; 2. Even some laws that are clearly applicable, such as tax, insolvency and securities laws, are not covered unless an opinion refers to them expressly. 9/15/

27 No-violation of Statutes, Rules or Regulations B. However, the universe of statutes, rules and regulations to be considered in a cross-border transaction is broader and different than in a U.S. domestic transaction. C. The ABA Report recommends as a way to help reduce the risk of misunderstandings about the coverage of a no violation of law opinion that an outbound opinion include or set out the following: 1. A general statement that the opinion only covers statutes, rules and regulations that a lawyer in the Covered Law State exercising customary professional diligence would reasonably be expected to recognize as being applicable to the entity, transaction or agreement to which the opinion relates; 2. A non-exclusive list of statutes, rules and regulations which are not covered in US opinions as a matter of customary practice. 9/15/

28 No-violation of Statutes, Rules or Regulations 3. An non-exclusive list of a number of specialized statutes, rules and regulations, mostly federal, which rarely apply to domestic U.S. transactions but do apply to similar transactions in a cross-border context because non-u.s. parties are involved or performance occurs outside the United States. D. Sometimes considerable time and effort is spent analyzing particular U.S. laws that may be applicable to a cross-border transaction and the transaction is structured to comply with such laws. In such a case, the opinion preparers may be willing to cover those laws in their no violation of law opinion. If they do, it would be best for the opinion to say so specifically to reduce the risk of misunderstandings over which laws are or are not covered. 9/15/

29 No-violation of Statutes, Rules or Regulations E. Lawyers are often asked to opine that the execution and delivery of the agreement and the consummation of the transaction do not require, except as set forth in the opinion, any consent of, approval from, or filing with any governmental authority pursuant to the covered law. F. Before an opinion preparer gives either a no violation of law opinion or a no approvals or filings opinion, the opinion preparer needs to have a general understanding of the transaction and relevant obligations the parties are undertaking in the agreement as interpreted under the Chosen Law. Gaining that understanding and deciding what needs to be done to give the opinion can be relatively easy or exceedingly difficult, depending on the circumstances. 9/15/

30 No-violation of Statutes, Rules or Regulations Sample language from the ABA Report: Except as set forth below, the execution and delivery of the Agreement by the Company and consummation by the Company of the transactions contemplated by the Agreement do not result in any violation by the Company of statutes of the United States or [COVERED LAW STATE], or rules or regulations thereunder, that, subject to the limitations in the following sentence, we would reasonably be expected to recognize as being applicable to an entity, transaction or agreement to which this opinion letter relates. The foregoing opinion does not cover, without limitation, the following statutes, rules and regulations: [ ], or other statutes, rules, or regulations customarily understood to be excluded even though they are not expressly stated to be excluded. 9/15/

31 Entity Status, Power, and Action A. Opinion substantially the same as in a domestic transaction. B. However, the opinion giver must consider whether he or she has sufficient understanding of the scope of the client s obligations under the transaction documents. C. Opinion giver does not need to understand each provision of the transaction documents but must be comfortable he or she has an understanding of the general scope of the client s obligations thereunder to reach the customary conclusions necessary to give a power and authority opinion? 1. General scope of the activities client is committing to perform; 2. If general scope is not obvious, opinion preparers may wish to seek clarification from the client or from non-u.s. counsel. 9/15/

32 Entity Status, Power, and Action Sample language from the ABA Report: The Company is validly existing as a corporation and in good standing under [COVERED LAW STATE] law, has the corporate power to execute and deliver the Agreement and to perform its obligations thereunder, and has duly authorized, executed and delivered the Agreement. 9/15/

33 No Breach or Default A. As with the previous opinion on status and power, the no breach or default opinion is substantially the same as in a domestic transaction, but not quite. In the international context, it is more difficult. 1. It requires an understanding of the specific contractual obligations the client is undertaking (beyond the transaction s general scope/structure as for a power and authority opinion); and 2. Opinion preparers are analyzing contract obligations under the non-u.s. law governing the transaction documents. B. The opinion may be giveable if it is limited to those obligations that could result in a breach/default under particular specified other contracts to which the client is already a party; however, what those obligations are, and therefore whether the opinion can be given, will depend on the nature of the transaction and the terms of the other contracts being covered. 9/15/

34 No Breach or Default C. Typically it is wise to exclude from coverage contracts that are governed by non-u.s. law: 1. The plain meaning approach that we use in giving no breach/default opinions covering agreements governed by U.S. law other than the covered state s law is not suitable when examining non-u.s. law contracts. Sample language from the ABA Report: The execution and delivery by the Company of the Agreement does not and the performance by it of its obligations thereunder will not result in a breach of, or constitute a default under, or result in the creation of a lien or a right of acceleration under, any of the agreements or instruments listed in Schedule to this opinion letter (the Listed Agreements ). We have interpreted the provisions of the Listed Agreements as those provisions would be understood in [COVERED LAW STATE] whether they are governed by the law of [COVERED LAW STATE] or by the law of another jurisdiction. 9/15/

35 Sovereign Immunity A. Opinions addressing sovereign immunity of U.S. parties where: 1. U.S. party is a private business entity and not under the control of the federal government, a state government or another entity that is entitled to sovereign immunity (a U.S. sovereign ); 2. U.S. party is or may be a U.S. sovereign, but has legally waived sovereign immunity. Sample language from the ABA Report: No sovereign immunity of U.S. party: Neither [U.S. PARTY] nor its assets are immune on grounds of sovereign immunity from (i) suit in connection with the Agreement in the courts in [COVERED LAW STATE] [or United States federal courts] or (ii) related legal process, including service of process, attachment of assets, or enforcement by those courts of a judgment against the Company related to the Agreement. 9/15/

36 Sovereign Immunity B. Opinions addressing sovereign immunity of non-u.s. parties: 1. Governed by the Foreign Sovereign Immunities Act of 1976 ( FSIA ); 2. Rather than relying on the commercial nature of the transaction or another exception under the FSIA, U.S. parties typically require a non-u.s. party that might be a foreign state to waive sovereign immunity; 3. Ordinarily opinion can be given that a foreign sovereign s waiver of sovereign immunity is valid, binding and effective under the FSIA. 9/15/

37 Sovereign Immunity Sample language from the ABA Report: Waiver of sovereign immunity under FSIA by Non-U.S.Party: Under the Foreign Sovereign Immunities Act of 1976, as amended, [NON- U.S. PARTY] has validly waived its sovereign immunity (if any) from (i) suit in the courts in [COVERED LAW STATE] and United States federal courts and (ii) related legal process, including service of process, attachment of assets, or enforcement by those courts of a judgment against [NON-U.S. PARTY] related to the Agreement. 9/15/

38 Forum Selection A. In domestic U.S. transactions separate opinions on forum selection clauses normally are not requested (except in situations where state statutes like NY Gen.Obl. L validate inbound forum selection). B. The ABA Report concludes that the opinion is one that non- U.S. parties typically expect and can be given so long as the covered law state has adopted the modern view (the parties choice is entitled to great deference) vs. the old view (court always knows best). 9/15/

39 Forum Selection C. In cross-border transactions, it may be more difficult for an opinion giver to determine: 1. Whether a clause is permissive or mandatory and whether U.S. law or non-u.s. law governs the interpretation of the forum selection clause? D. Determination whether the forum selection clause is mandatory or permissive: 1. The analysis required when the forum selection clause is mandatory is different, and in some respects more complex, than when it is permissive, because the opinion means that a U.S. court would dismiss the case and send the plaintiff to the chosen non-u.s. court (so called ouster ) though it may not know whether the non-u.s. court will be available, to or willing to, resolve the dispute. 9/15/

40 Forum Selection 2. The language/intent of the parties may be unclear, in which case, note that the norm outside the U.S. (e.g., EU) is that a clause is presumed mandatory unless it is clearly permissive (opposite presumption in the U.S.). E. Determination of applicable law: after many years of confusing and conflicting case law, todays consensus (see Martinez v. Bloomberg LP, 740 F.3d 211 (2d Cir. 2014)) is that: 1. The chosen law (non-u.s. law) governs the interpretation of the forum selection clause; 2. The covered law (U.S. law) governs the enforceability of the clause. 9/15/

41 Forum Selection F. If the outbound forum selection is mandatory, the Bremen exception (see Atlantic Marine Constr. Co. v. U.S. Distr. Court for the W.D. of Texas, 134 S.Ct. 568 (2013)) must be considered. The exception applies if: 1. Enforcement would be unreasonable and unjust; 2. The clause is invalid for such reasons as fraud or overreaching, undue influence or abuse of bargaining power; 3. Enforcing the clause would contravene a strong public policy of the jurisdiction where suit is brought. 9/15/

42 Forum Selection G. Possible application of the Bremen exception is not covered by the opinion: 1. The opinion giver cannot predict whether/how a court in the covered law state would apply the Bremen exception; 2. While the exception need not be stated, the ABA Report recommends that the opinion refer to the possible application of the Bremen exception expressly to help reduce the risk of misunderstanding. H. Federal vs state courts: the handling of forum selection in the federal courts was a source of uncertainty until a conflict among the circuits was resolved by the U.S. Supreme Court in Atlantic Marine, which strongly affirmed that the modern view applies in federal court. 9/15/

43 Forum Selection I. Venue: Some opinion givers are careful to exclude the issue of venue because USC 1404 gives federal courts discretion to transfer the case from one district to another. J. State law issues: (see, e.g., Verdugo v. Allianzgroup, L.P., 237 Cal App 4th 141 (Cal.App. 2015)): statutes that codify specific nonwaivable public policy rules are treated as exceptions to the enforcement of mandatory forum selection clauses naming courts in other states or countries. Sample language from the ABA Report: Validity of mandatory outbound forum selection clause: The Company s agreement in Section of the Agreement that the courts of [FOREIGN COUNTRY] shall have exclusive jurisdiction is valid and enforceable under the law of [COVERED LAW STATE] for actions relating to contract claims arising under the Agreement, provided that a court may decline to give effect to such agreement because enforcement would be unreasonable or unjust under the principles enunciated in the decision of the U.S. Supreme Court in M/S Bremen & Unterweser Reederel, GmbH v. Zapata Off-Shore Co., 402 U.S. 1 (1972) and in related cases, including that it would contravene a strong public policy of [COVERED LAW STATE]. 9/15/

44 Forum Selection Sample language from the ABA Report: Validity of permissive outbound forum selection clause: The Company s agreement in Section of the Agreement to submit to the non-exclusive jurisdiction of the courts of [FOREIGN LAW COUNTRY] is valid and enforceable under the law of [COVERED LAW STATE] for actions relating to contract claims arising under the Agreement. Validity of mandatory inbound forum selection clause: The Company s agreement in Section of the Agreement that the courts of [COVERED LAW STATE] [and United States federal courts] shall have exclusive jurisdiction is valid and enforceable under the law of [COVERED LAW STATE] [and the federal law of the United States] for actions relating to contract claims arising under the Agreement. Validity of permissive inbound forum selection clause: The Company s agreement in Section of the Agreement to submit to the non-exclusive jurisdiction of the courts of [COVERED LAW STATE] [and United States federal courts] is valid and enforceable under the law of [COVERED LAW STATE] [and the federal law of the United States] for actions relating to contract claims arising under the Agreement. 9/15/

45 Recognition and Enforcement of Foreign Judgments A. Most states have adopted some version of the Uniform Foreign Money Judgments Recognition Act and therefore giving the opinion is essentially a matter of statutory analysis. Different states, however, have different statutory exceptions/requirements (which in some cases expand upon the Uniform Act). B. Opinion givers should be careful to conform the scope of the opinion (and its qualifications) to the specifics of the statute in effect in the covered law state. C. By referring to the exceptions as set forth in the sample language, the opinion confirms that it does not cover the possible application of the exceptions in the future to a specific foreign judgment. 9/15/

46 Recognition and Enforcement of Foreign Judgments D. Note the possible passage of the impact of the Hague Convention on Choice of Courts Agreements: 1. On October 1, 2015 became effective for the EU (except Denmark) and Mexico; 2. The U.S. State Department has recommended that Congress ratify it and enact implementing legislation using a cooperative federalism approach, but timing is uncertain. 9/15/

47 Recognition and Enforcement of Foreign Judgments Sample language from the ABA Report: To the extent that it relates to contract claims arising under the Agreement, a final and conclusive judgment granting or denying recovery of a sum of money, other than a judgment for taxes, a fine or other penalty, rendered by a court of [FOREIGN COUNTRY] against the Company that is enforceable in [FOREIGN COUNTRY] will be recognized as valid and enforced under the law of [COVERED LAW STATE] by the courts of [COVERED LAW STATE] or by United States federal courts having jurisdiction and applying the law of [COVERED LAW STATE], without a re-examination of the substantive issues underlying the judgment, subject to (i) grounds for non-recognition and exceptions to enforcement set forth in the Uniform Foreign Money-Judgments Recognition Act as adopted in [COVERED LAW STATE] (the Act )[IF OPINION GIVER WISHES TO REFER TO PARTICULAR EXCEPTIONS FROM THE STATUTE, ADD --, which include, but are not limited to, ] and (ii) the court s power to stay proceedings to enforce a foreign judgment pending determination of any appeal or until the expiration of time sufficient to enable the defendant to prosecute an appeal. [IF APPLICABLE IN THE COVERED LAW STATE, ADD -- This opinion is based on the assumption that the law of [FOREIGN COUNTRY] requires a court of competent jurisdiction in [FOREIGN COUNTRY], in a reciprocal manner, to recognize and enforce a final and conclusive judgment of a court of [COVERED LAW STATE] without reconsideration of the merits.] 9/15/

48 International Arbitration Clauses A. The opinion means that under the law of covered state and federal law the agreement to arbitrate is enforceable. B. The principal goal of the 1958 UN Convention on Recognition and Enforcement of Foreign Arbitral awards (the New York Convention ) is to keep international disputes out of the national courts of signatory countries if the parties agree to arbitrate; this is a very strong policy that U.S. courts respect by taking a narrow view of their role when a party challenges its obligation to arbitrate a dispute. 9/15/

49 International Arbitration Clauses C. The New York Convention was implemented in Chapter 2 of the Federal Arbitration Act ( FAA/2 ), which preempts state law: 1. Judicial decisions on domestic arbitration have been less consistent than on international arbitration, and in some cases have raised doubts as to the enforceability of mandatory arbitration in certain situations (although the U.S. Supreme Court has repeatedly affirmed the validity of arbitration clauses under the FAA); 2. Most of the issues that have made case law on domestic arbitration at the state level uncertain do not arise in international arbitration cases; 3. While many lawyers do not give opinions on arbitration clauses in U.S. domestic transactions, cross-border transactions are different because of the New York Convention. 9/15/

50 International Arbitration Clauses D. The New York Convention and FAA/2 apply only to arbitration agreements arising out of international contractual transactions and reciprocity is required: the New York Convention and FAA/2 only apply if arbitral award is made in a country that has signed the New York Convention. E. Opinion givers should consider including an express assumption that arbitration will not take place in the U.S., unless the agreement is clear that arbitration in the U.S. cannot happen or the international nature of the arbitration is clear from other aspects of the transaction. F. Adhering to a policy of promoting arbitration as a reliable dispute resolution mechanism for cross-border transactions, U.S. courts have consistently compelled parties to arbitrate and given great deference to the jurisdiction of the arbitrators. 9/15/

51 International Arbitration Clauses G. A court may refuse to enforce an agreement to arbitrate if it finds that it is null and void, inoperative, or incapable of being performed: 1. Courts focus is on the arbitration clause itself, not the agreement in its entirety (doctrine of separability, -- i.e., courts try to separate the agreement to arbitrate from the main transaction); 2. Unless a party was deceived into agreeing to arbitration, claims that the agreement as a whole is null and void are for the arbitrators to decide. 9/15/

52 International Arbitration Clauses H. There are five specific FAA/2 requirements: 1. A written agreement to arbitrate; 2. The non-u.s. country involved must be a signatory to the New York Convention; 3. The contract must involve an international transaction; 4. The relationship among the parties is commercial; and 5. The subject matter of the transaction is arbitrable. 9/15/

53 International Arbitration Clauses I. The opinion giver has to confirm that the five FAA/2 prerequisites are satisfied: 1. arbitrability may seem a scary issue, but in practice U.S. courts have held very few, limited categories of disputes not arbitrable under U.S. law; 2. commercial relationship: the subject matter of cross-border transactions in which opinions are given is extremely unlikely not to be commercial. Sample language from the ABA Report: The arbitration clause in Section of the Agreement to submit to mandatory arbitration in [ARBITRAL TRIBUNAL OUTSIDE THE UNITED STATES] is valid and enforceable under the federal law of the United States and the law of [COVERED LAW STATE] to the extent that the arbitration relates to contract claims arising under the Agreement, except to the extent that an exception set forth in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the Federal Arbitration Act, 9 U.S.C applies. 9/15/

54 Enforcement of Foreign Arbitral Awards A. Book-end under the New York Convention and FAA/2: at the front end courts must defer to the jurisdiction of arbitrators, at the back end they must put the state s enforcement powers behind an international arbitral award that has been properly rendered. B. The NY Convention and FAA/2 apply only to foreign arbitral awards, which are characterized by the following: 1. The award was made outside the U.S. 2. The award is not considered a domestic award under Chapter 1 of the FAA because it covers an international contractual transaction. 9/15/

55 Enforcement of Foreign Arbitral Awards C. If arbitration takes place in the U.S., even though it is pursuant to an arbitration clause in a cross-border transaction, Chapter 1 of the FAA may apply. As a result, many opinion givers expressly assume that arbitration will not take place in the U.S. D. Under the New York Convention and FAA/2 courts are required to recognize foreign arbitral awards without reevaluating the merits: 1. Poceedings in a U.S. court do not represent an opportunity to appeal the award as they are only the mechanism to enforce it where the losing party has assets/operations; 2. Hence, the list of seven grounds for refusing recognition and enforcement of a foreign arbitral award in the New York Convention and FAA/2 is exhaustive: 9/15/

56 Enforcement of Foreign Arbitral Awards 3. Consistent with U.S. policy favoring international arbitration, U.S. courts generally have declined to refuse enforcement of foreign arbitral awards on the basis of those seven grounds (including public policy). E. In any event, the opinion does not cover possible applicability of any of the seven defenses, whether or not the qualification is stated expressly. 9/15/

57 Enforcement of Foreign Arbitral Awards Sample language from the ABA Report: Except to the extent that an exception set forth in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention ) and the Federal Arbitration Act, 9 U.S.C (the FAA ) applies, an arbitral award made by [ARBITRAL TRIBUNAL OUTSIDE THE UNITED STATES] in accordance with the requirements of Section of the Agreement will be recognized and enforced under the New York Convention and the FAA to the extent that the arbitration relates to contract claims arising under the Agreement, if a proceeding to enforce the award is properly brought in a United States federal court within three years after the arbitral award is made. 9/15/

58 Where Do We Go From Here Efforts are ongoing as part of the ABA Legal Opinions Committee s mission, building on the ABA Report and work done by London, Netherlands and Toronto bar groups, to promote consensus and shared practices among U.S. and non-u.s. lawyers active in crossborder transactions. Some practices are only addressed tangentially in the ABA Report and are the subject of ongoing analysis because, while they are rather standard outside the U.S., they are not common practice in U.S. domestic transactions. A small group of US and foreign lawyers are working together to identify projects which might be undertaken to facilitate the giving and receiving of opinions in cross-border transactions. Sullivan & Worcester LLP 9/15/