6 January 2012

The Big Freeze

A major part of risk management when operating across national boundaries involves a carefully constructed dispute resolution mechanism. Such mechanisms are intended to confine disputes to mutually agreed jurisdictions and procedures (usually international arbitration in an acceptably ‘safe’ country).

But how effective are such mechanisms? The reality is that parties to international contracts are at risk of foreign courts freezing their assets around the world, despite any dispute resolution clauses and despite there being no security over those assets.

Parties who fear that their counterparty might deal with its assets in a manner that would result in a judgment or arbitral award being wholly or partly unsatisfied may be able to approach courts other than the courts of the place where the dispute is being resolved to obtain orders freezing the counterparty’s assets in a jurisdiction where they may seek to enforce that judgment or award. These are known as ‘freezing orders’ or ‘Mareva orders’ (after the case in which they first came to prominence).

Freezing orders can have a major impact on businesses, their day-to-day operations, commercial negotiations and financing arrangements. They may be obtained even if:
  • there is no dispute about the venue and method of dispute resolution
  • the assets are located in a jurisdiction that is otherwise unconnected to the dispute; and
  • the moving party has given no security over those assets to the person with whom they are in dispute.
The Federal Court of Australia recently froze shares worth over AUD$700 million in an Australian publicly listed company in a case involving three parties, none of whom actually operated in Australia, but one who held a significant parcel of shares in an Australian listed company. One of the parties subject to the freeze was not even a party to the contract. See The Big Freeze: Exposure to asset preservation orders around the world.

Parties seeking certainty as to the courts that may make interim orders might provide in their contract that the parties submit to the exclusive jurisdiction of particular courts for the purposes of interim relief. But such clauses are untested in Australia, could cut both ways and may affect the conduct of any proceedings for final relief. Are your international contracts sufficiently insulated against the big freeze that might come your way?

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