In a recent case I handled, international legal issues affected the parties’ ability and motivation to settle. While I’m not an expert in international law issues (and no one can be an expert in all international legal issues of course), it was important to understand the exact nature of my client’s legal issues in his home country so that I could effectively articulate his motivations and expectations/necessities to reach an effective settlement.
USUALLY CASES ARE DECIDED (OR SETTLED) ON PURELY ECONOMIC ISSUES AND MANY LAWYERS ARE WELL EQUIPPED TO HANDLE SUCH A NEGOTIATION. BUT WHAT HAPPENS WHEN THE DIRECT ECONOMIC LOSSES CAUSED BY A BREACH ARE IMPORTANT TO ONE PARTY?
My case involved a resident of India clothing manufacturer suing a domestic clothing company for breach of contract. My client was an Indian manufacturer suing a domestic dress company specializing in ladies’ evening-wear and prom dresses. The parties had done business with each other for nearly seven (7) years prior to the dispute and so credit terms were very generous to the defendant. For reasons irrelevant to this article, the defendant stopped paying for goods that were shipped. The value of the goods shipped and not paid for were nearly $250,000. At this point, you’re probably expecting a straight forward breach of contract litigation where the parties use litigation as a tool to gain leverage and get the best deal possible considering the risks of going to trial and difficulties of collecting on a judgment. Given the facts of the case, obtaining a judgment would have been a straightforward affair (as close to a sure thing in the litigation business anyways) despite the oddball (or creative depending on your perspective) cross-claims.
But it turns out foreign governments have an interest in making sure exporters are getting paid so that they don’t build up foreign currency imbalances. Bargaining for a settlement was a unique affair however, since the foreign party wasn’t interested in recovering his entire outstanding amount. And this is where the foreign law/regulatory considerations come in.
When exporting goods out of India, a shipper/seller must obtain insurance to cover the value of the goods. Typically, this insurance coverage will insure 90% of the value of the goods. The insurance company will require that the insured exporter make an effort to recover the value of the goods from the breaching party. This is not a matter of a simple demand letter. In some cases (like mine), the insurance company will actually require a lawsuit. The client is always the exporter though, not the insurance company.
The exporter is not seeking financial recovery since they’ve already been compensated for 90% of the value of the goods by the insurance company. When an exporter has a sizeable foreign currency imbalance due to a breaching party, that exporter is put on a ‘Caution List’ of sorts which limits their ability to seek insurance on future exports. Practically speaking, being on the Caution List also limits the exporter’s ability to obtain bank credit needed to produce goods. The longer the currency imbalance is left unresolved, the worse the consequences with the ultimate consequence being that an exporter can lose their export license altogether; a business death sentence if there ever was one.
Therefore, in trying to reach a settlement, a lawyer needs to understand the lowest number the insurance company is willing to take to settle the case. The insurance company’s motivation to obtain a higher judgment is mitigated by the fact that they will end up paying the legal bills to the insured after collecting whatever they paid out on the claim. Anything above the claim amount goes to the exporter. Sure, my client could’ve gotten greedy and gone for a higher judgment amount but his motivations were limited by the facts that he already received most of his losses and that he wanted to get off the Reserve Bank of India’s ‘Caution List.’
*Nothing in this article is meant to provide a legal opinion on Indian Export Law. The sole point was to show how non-contractual issues related to the value of the goods or damages related to the value of the goods sold but not paid for motivated the resolution of what was at first a straight-forward breach of contract case.
1. By “direct economic issues” I mean to say issues that are related to how much economic loss one party can afford to sustain or incur on the other side. In a business litigation matter, wise clients (or wisely advised clients) should always approach litigation as a business expense and not some sort of quest for justice.
2. There were other claims based on non-contractual issues, but mainly the case stemmed from one party not paying for goods ordered from the other party.
3. That’s the subject of another blog entry, coming soon.
4. Legal fees are covered by the insurance coverage, but the client must spend out of pocket before being reimbursed. You can bet the insurance company is keeping an eye the bill though.