Contracting with governments: pitfalls, arbitration, sovereign immunity and enforcement

Entering into a contract with an entity owned or controlled by the state poses unique challenges not faced when dealing with a private commercial counterparty. Parties should be aware of certain distinctive features of negotiating with a state entity from the start of any commercial relationship. It is particularly important for parties to consider these implications when conducting business in the Middle East given that:

i. state entities play a major role in the procurement of major projects, particularly in GCC countries; and

ii. the reconstruction of infrastructure and the development of natural resources in countries such as Iraq require significant foreign investment in the form of contracts with state-owned entities.

Determining whether or not a commercial party is dealing with a state entity is not always a straightforward process in the Middle East. As such, parties should take extra care and consider the following factors at the outset:

a) the capacity of the entity to enter into an arbitration agreement;

b) the ability of the state in question to raise a defence of sovereign immunity in the future; and

c) the investment treaty protections that a company may be able to utilise.

In this article, we set out the key factors that parties should consider when negotiating with a state entity in order to maximise the protections available should a dispute arise at a later point.

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DIS adopts model clause to be used with ISDA Master Agreement

Effective January 2017, the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit, "DIS") has adopted a new model clause to be used with the 2002 ISDA Master Agreement ("DIS ISDA Model Clause"). The DIS ISDA Model Clause provides for use of the institutional rules of the DIS and Frankfurt, Germany as the seat of the arbitration. While the underlying substantive agreement is subject to English or New York law, the arbitration clause is governed by German law. The DIS ISDA Model Clause can be found here:

http://www.disarb.org/en/17/clause/isda-model-clause-for-dis-rules-frankfurt-main-seat-id35

Background

In 2013, the International Swaps and Derivatives Association (ISDA) published the 2013 ISDA Arbitration Guide (the "Guide"). The Guide's purpose was to provide guidance on the use of arbitration clauses with either the ISDA 2002 Master Agreeement or the ISDA 1992 Master Agreement. The Guide included a range of model clauses for a number of combinations of national and international arbitration institutions and arbitration seats for users to choose from.  However, the DIS was not among the institutions featured, nor was any German city. It had subsequently been suggested to include a model clause for Frankfurt, not least because of the economic size of Germany but also because Frankfurt is the largest financial centre in continental Europe and the seat of the ECB (see "Finanzbranche entdeckt Schiedsgerichte", Börsen-Zeitung, No. 201, October 2013).

In cooperation with ISDA, the DIS has now closed this gap. 

Outlook  

With the newly-adopted DIS ISDA Model Clause, financial parties – especially when doing business in Germany – can now choose arbitration in Germany under the auspices of the DIS. For banks with German customers, this is a big step forward: they can offer arbitration on 'home-turf' to customers who might otherwise be reluctant to agree to arbitration. For the DIS, this is another success in its continued bid to establish itself among the top arbitration institutions.

Dr Peter Werner, Senior Counsel at ISDA, commented: "We welcome the interest in ISDA model clauses expressed by German market participants and the dispute resolution community. ISDA is looking forward to including the new model clause as one of the additional appendices in the next edition of the ISDA Arbitration Guide."

Dr Mathias Wittinghofer
Dr Mathias Wittinghofer
Partner
+49 69 2222 82400
Tilmann Hertel
Tilmann Hertel
Senior Associate
+49 69 2222 82524

Podcast – Unilateral Arbitration Clauses: Enforcement Issues and Drafting

In this short podcast, senior professional support lawyers Hannah Ambrose and Vanessa Naish look at some of the issues surrounding unilateral arbitration clauses. Unilateral arbitration clauses are dispute resolution agreements which provide for either litigation with an option for one party to elect to arbitrate disputes, or arbitration with an option for one party to elect to litigate disputes. This podcast discusses the benefits and risks of such clauses, enforceability issues, and key considerations for drafting.

For further information or to suggest topics for future podcasts, please contact Hannah Ambrose, Professional Support Lawyer, Vanessa Naish, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

You may also be interested in a our previous podcast “Arbitration in Multi-Party and Multi-Contract Scenarios – What You Need to Know”, which is available here.

Vanessa Naish
Vanessa Naish
Professional Support Lawyer
+44 20 7466 2112

Hannah Ambrose
Hannah Ambrose
Professional Support Lawyer
+44 20 7466 7585

 

 

Podcast – “Arbitration in multi-party and multi-contract scenarios- what you need to know”

In this short podcast, senior professional support lawyers Hannah Ambrose and Vanessa Naish look at some of the issues surrounding the drafting of arbitration clauses for complex transactions, and provide insight into how to draft consolidation and joinder provisions to ensure that your dispute resolution clause is both effective and efficient. Continue reading