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Vodafone Arbitration Victory a Reminder to Consider Political Risk

Vodafone Arbitration Victory a Reminder to Consider Political Risk

In a recent, little-publicized international arbitration decision, an intergovernmental dispute resolution body ruled on September 20, 2020 that Netherlands-based Vodafone was not liable for an estimated $2.2 billion tax bill demanded by the Government of India and that India had violated the “fair and equitable” treatment provisions under a 1995 bilateral investment treaty between India and the Netherlands. The case, titled Vodafone International Holdings BV v. The Republic of India was initiated in 2014 before the Permanent Court of Arbitration (PCA), an international body based in The Hague.

The long story of the case underscores the importance of understanding political risk for those doing business overseas.  Country-specific efforts to balance investment promotion with the need to generate tax revenue can lead to legal changes that can either unlock opportunities or increase risks for investors.  Additionally, the case shows how bilateral trade and investment treaties (BITs) create legal mechanisms that can be utilized to adjudicate disputes such as the one between Vodafone and India.

In this instance, India’s attempts to capture revenue from international investment transactions led it to pass legislation allowing transactions to be taxed retroactively, leading to drawn-out legal disputes with Vodafone and other companies.  Beginning in 2007, Indian tax authorities had unsuccessfully sound to levy taxes on Vodafone after its roughly $11 billion purchase of the Indian mobile phone company Hutchison Essar Limited (HEL).  After legal appeals by Vodafone, India’s Supreme Court held in January 2012 that Vodafone’s acquisition of HEL was not liable for taxes under India’s Income Tax Act of 1961.

Retrospective Legislation

In response to the Supreme Court decision, the Indian parliament passed the Finance Act of 2012, which amended the Tax Act of 1961 and gave its government authority to retroactively tax past transactions.  With a new law in force, India again sought to levy the tax fee against Vodafone plus interest and penalties totaling roughly $3.79 billion.

Citing the 1995 bilateral trade and investment treaty between India and the Netherlands, Vodafone invoked the treaty’s arbitration provisions in April 2014, bringing the case before the PCA.  Some six years later, under the authority granted to it by the India-Netherlands BIT,  the PCA ruled in favor of Vodafone, ordering India to stop seeking tax payments from Vodafone and pay Vodafone over $4 million in legal fees.  The Vodafone case is one of three cases before the PCA in the wake of India’s retroactive attempts to collect tax under the Finance Act of 2012.

Arbitration Case Definition

Arbitration – the hearing and determining of a dispute or the settling of differences between parties by a person or persons chosen or agreed to by them.

Political Risk and Remedies

It remains to be seen how the PCA’s decision will be enforced.  Just before the PCA ruling, India’s Supreme Court had ruled against Vodafone, upholding the India’s efforts to collect revenue under the 2012 Finance Act.  These extensive and costly proceedings highlight just some of the potential difficulties that companies face when doing business overseas in countries where shifting political priorities can put investments or agreements at risk.  Solid political risk analysis, trusted legal counsel, and political risk insurance are all tools companies need to navigate global trade and investment.

Bilateral trade and investment treaties (called BITs), such as that between the Netherlands and India in 1995, are important legal instruments to understand and utilize.  BITs include agreed upon language to protect investments and encourage fair and transparent legal treatment of transactions and contracts.

In addition, BITs often create procedures, such as international arbitration, for disputes that cannot be settled in domestic courts.

U.S. Department of Commerce’s International Trade Administration (ITA) maintains a list of BITs between the U.S. and other countries.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

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Upcoming LVMH, Tiffany & Co. Legal Battle Shines a Light on Political Risk

Upcoming LVMH, Tiffany & Co. Legal Battle Shines a Light on Political Risk

LVMH Legal Case

A dispute between luxury goods brands Moët Hennessy Louis Vuitton (LVMH) and Tiffany & Co. (Tiffany) highlights the continued political volatility of the global economy as companies and their home countries try to recover from the coronavirus downturn.  In November 2019, LVMH reached an agreement to buy US-based Tiffany in a deal said to be worth $16.6 billion.  The acquisition is set to be the biggest ever in the luxury goods market and would have added yet another iconic brand name to the LVMH conglomerate, which includes Christian Dior, Givenchy, and Dom Perignon champagne, along with dozens of brands across various sub-sectors of luxury goods.

Yet on September 9, nine months into the deal and two months before an agreed-upon November 24, 2020 deadline to complete the sale, Paris-based LVMH announced that it was backing out of the deal, asserting that Tiffany had been mismanaged during the pandemic and its poor performance in 2020 constituted a material adverse event.  LVMH then added a political wrinkle to the story, noting that it had received a letter from French Foreign Minister Jean-Yves Le Drian requesting that it back out of the deal.  The letter is said to have referenced anticipated trade tension between France and the United States in response to French efforts to tax technology companies, including industry giants like Google and Amazon.  According to LVMH, the French minister’s letter constitutes a “valid, legally-binding order.”

Tiffany quickly contested LVMH’s moves, filing suit against LVMH in the Chancery Court of Delaware, which has jurisdiction over the international deal, and demanding that the deal be completed at its agreed upon price of $135 per share.  The case has been fast-tracked for a January 2021 trial.  Some industry watchers note that LVMH CEO Bernard Arnault, the wealthiest man in France, is simply unwilling to pay a pre-pandemic price for a company that has seen major losses due to the pandemic and only has only recently reported improved numbers.  While the entire luxury goods sector has seen tremendous losses in 2020, larger companies like LVMH, with a more diverse range of products and capacity to shift to e-commerce, have been better able to adapt to the pandemic than have firms with greater dependence on retail outlets, tourism, or Chinese demand.

It remains to be seen whether LVMH’s attempts to scrap the deal will hold up under legal scrutiny, particularly its attempt to claim legally binding pressure from the French government.  The brewing legal fight shows how the coronavirus pandemic has rattled economic relationships and highlights a trade environment that can be easily strained, even among long-time allies with considerable two-way trade like France and the United States.  As the global economy works its way out of the pandemic and companies consider new operating models and markets, the need for an adequate political risk assessment is evident

Understanding Political Risk

Political risk insurance protects cross boarder investments, trade, permanent/mobile assets and contracts against various perils such as political violence, currency inconvertibility, foreign government intervention, expropriation, confiscation, nationalization, forced abandonment. 

 The COVID-19 pandemic has accelerated a tendency toward economic nationalism and protectionism in the current trade and investment environment.  The LVMH/Tiffany case shows an example of how governments may seek to influence trade and investment deals to benefit domestic companies, or as part of a broader political strategy

 As the LVHM/Tiffany gets litigated in the Chancery Court of Delaware watch to see if the demise of the transaction meets the following definition of an insured peril on a political risk policy:

“an act or a decision on the part of the government of the Buyer’s country, the Insured’s

Country or any other country specifically named in the Declarations, which prevents the

performance of the Commercial Contract.”

Political risks can drastically impact a company’s investment in a host country.  Foreign government intervention or political violence can render a company unable to operate or withdraw their capital from a host country. Yet, as the global economy slowly recovers from the depths of the pandemic downturn, exporters will need to be aware that as new opportunities are created overseas, a proper assessment of both credit risk and political risk, and consideration of political risk insurance is prudent. 

See Securitas’ Guide to Political Risk Insurance or contact Securitas to learn more.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

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Pandemic Invokes Force Majeure

Pandemic Invokes Force Majeure

In mid-February, during the height of the Coronavirus crisis in China, the China Council for the Promotion of International Trade (CCPIT), a state-run organization, reported that it had issued over 1,600 “force majeure” certificates, in an effort to protect Chinese companies from legal issues related to non-compliance with their contractual obligations.  These certificates at the time covered a value of about $15.7 billion. By the first week of March, the number of Chinese force majeure declarations had risen to over 4,800 companies covering contracts worth $53.8 billon.

What is a “Force Majeure” Declaration?

When a company declares “force majeure,” it is invoking a clause, typically noted in its contract with its clients, that states that due to circumstances beyond its control, it is unable to fulfill the terms of the contract.

Invoking the clause is an effort to typically delay or possibly be released from contractual obligations without legal or financial liability.  According to one legal definition: “Generally, force majeure refers to the occurrence of an extraordinary event beyond the reasonable control of a party and prevents that party from performing its obligations under a contract.”

Force majeure clauses are common, but vary from industry to industry.  On a personal level, property owners may be familiar with mortgage contract language stating various natural disasters or “Acts of God” that can relieve the owner of contractual obligations.

The oil and gas sector and other industries that utilize long-term supply contracts often have extensive force majeure clauses that also include human interventions such as government action, terrorism, war, and strikes that can cause a break in operations beyond the control of one of the parties to a contract.

From industry to industry, and company to company, the details and specificity of force majeure clauses vary widely, and are being tested by the economic disruption wrought by the Coronavirus pandemic.  According to one source, “if you’ve seen one force majeure clause, you’ve seen one force majeure clause.”

According to the World Bank, there is no template or standard wording for force majeure clauses or for the events that may or may not cause a force majeure declaration.

While no template exists, global organizations are attempting to introduce some basic standards. For example, the International Chamber of Commerce (ICC) updated its model force majeure contract language only recently (it includes terms like “plague” and “epidemic”).

While these efforts are useful in moving international business toward common terms and language, declarations of force majeure still remain subject to often dueling legal opinions and the decisions of specific courts and arbitrators.

A Legal Burden

According to one analysis, China’s above-noted attempt to offer companies blanket force majeure certificates are likely to be contested legally.  One reason noted is that the standard for a force majeure declaration may be different domestically in China than it is internationally – where many trade contracts are based on English common law, in which force majeure events are extensively enumerated and specific.

Some contracts may not contain reference to public health events such as epidemics or pandemics.  Additionally, if challenged legally, the burden is on the company making the declaration to prove that the events were unforeseen, unavoidable, and left the company in an impossible situation with no alternatives to meet its contractual obligations.  Already, some companies have taken their Chinese counterparts to task, rejecting their force majeure claims and setting up legal battles.

Seek Legal Advice

To avoid costly legal conflict, companies will often seek out a workable solution to avoid a force majeure declaration. The need to work out the details of myriad contractual obligations is said to be one of the main reasons that the International Olympic Committee and organizers of the 2020 Tokyo Summer Olympics took a longer time than most other sports leagues and planners of sporting events to declare a postponement due to Coronavirus.

The input of a trained legal advisor is invaluable when seeking to understand force majeure clauses and tailor contract language that is either specific or broad enough to account for a range of potential events – including public health crisis.

Legal counsel can also help draft language that conforms with both the details of doing business in a specific industry and existing legal precedents concerning force majeure declarations.

Get Proper Coverage

In the current environment, there is considerable likelihood that companies will face a force majeure declaration from either a supplier or buyer, or may even have to contemplate making a such a declaration due to unforeseen and unavoidable circumstances of Covid-19.

In addition to sound legal advice, companies need to have insurance coverage that meets a range of contingencies including force majeure.  The team at Securitas Global Risk Solutions has the necessary experience to discuss and advise clients on force majeure and trade credit insurance.  If you would like to discuss further, please contact Peter Seneca at 484-595-0100 or email him at pseneca@securitasglobal.com.

Disclaimer: The text above is for informational purposes only, and does not constitute legal advice.  Seek the input of a legal practitioner for more detailed information and advice on contract language and force majeure declarations.

 

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Reshaping Global Trade

Reshaping Global Trade

The rapid and continuing spread of novel coronavirus (Covid-19) continues to have a significant social impact as well as a profound hit to the global economy.  At the time of the World Health Organization’s (WHO) declaration of a global pandemic on March 11, 2020, the human toll of the disease stood at over 121,000 reported cases and 4,373 deaths spanning 110 countries.

These numbers are increasing, and the social and economic fallout continues.  Stock market declines in major economies reflect growing difficulty doing business and investor uncertainty about the near future.  Stock markets in the US fell nearly 10% on average on March 12 alone, with European stock markets falling well over 10% on the same day.

It is now obvious that no industry or economic sector will be spared by the impact of the virus.  Notable declines in tourism and airline industries are reverberating across supply chains.  Airline losses are estimated to be near $113 billion with governments mulling an economic stimulus for that industry.

Accordingly, trade flows are down, initially owing to the heavy toll of the virus on Chinese and other Asian manufacturing hubs, but also due to slowing consumer confidence and store closures worldwide.  Initial layoffs in the Port of Los Angeles, the first in the US directly owing to the crisis, have begun while both manufacturing and construction industries are trying to postpone difficult measures.

As businesses close, events are cancelled, and employees are told to stay at home in impacted countries, not only has the now pandemic cause a global downturn, but it’s unclear how long it will last and if it will lead to a recession.  Only recently, Goldman Sachs predicted that the US economy would grow only 0.9% in the first quarter and would not grow at all in the second quarter of 2020.

While the length and severity of the pandemic remains unknown, a fair follow-on consideration is how the global economy will prepare itself for the next crisis, and what the long-term impact will be on global trade flows.

The pandemic has shed a light on rising pre-crisis corporate debt.  Concerns for vulnerably indebted companies and sectors and helped to spur central banks around the world to drop interest rates recently.  Additionally, companies with too much supply chain exposure in China are likely to pursue efforts to diversify their supply chains, likely to other Asian locations or to North America.

As of March 3, 2020, Chinese companies had issued over 4,800 force majeure certificates, stating their inability to meet their contractual obligations with clients.

The need for companies to diversify their supply chain exposure and conduct systematic risk analysis is becoming more and more apparent.  Will there be a shift, and will it help US manufacturers and exporters? As always, the interconnectedness of the global economy makes it difficult to gauge.

While US importers may look to diversify away from China, US exporters to China will no doubt suffer.  Already, some analysts think that China will not be able to meet its obligations to increase purchases of US exports.  It’s possible that North American manufacturers, with a new free trade agreement in place, could present a viable competitor to overseas supply chains that look increasingly risky, post-coronavirus.

Risk is the operative word and what this unfolding pandemic has shown is that preparation and risk assessment are crucial for companies in today’s economy.  A major part of this effort should include proper insurance coverage for a wide range of contingencies.

Securitas Global Risk Solutions (“Securitas”) is an expert in helping companies develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Is Global Trade in Quarantine?

Is Global Trade in Quarantine?

The outbreak and spread of the Coronavirus disease (COVID-19) has stoked global fear of a pandemic.  Disruptions to business in China and other affected countries are rising as are worldwide disruptions to travel and trade as countries scramble to put safeguards in place to stem the spread of the virus.

For companies with overseas operations and business, this latest public health crisis underscores the importance of planning for the unexpected, including an annual comprehensive assessment to properly mitigate the risk of doing business overseas where situations can change quite rapidly.

Like earlier epidemics such as SARS in 2002-2003 and the Ebola outbreak of 2014-2016, efforts to contain transmissions involve a range of decisions to quarantine the sick and minimize human-to-human contact.  This proves particularly difficult in a global economy in which the flow of goods and people are both commonplace and vital, even in areas of the world seen as remote or rural.  Outbreaks raise public concerns and even outright fear in both nearby countries and worldwide, and can lead to political decisions in non-crisis countries to suspend travel or block the transport of some or all goods.  These actions are often sudden and unforeseen, with reaching consequences for complex supply chains.

Stories of the economic impact of Coronavirus are developing.  At present, the disease remains mostly centered in China and that country is expected to see the most drastic economic impact.  Already analysts are predicting both a significant first-quarter economic slowdown and an overall GDP decline for 2020 as many businesses remain closed or people remain at home, especially in the auto-manufacturing hub of Wuhan at the center of the crisis.  With China’s economy already cooling, (GDP fell to 6.1% in 2019 from 6.6% in 2018) it remains to be seen what the impact will be on China’s export-driven growth, particularly electronics exports or its $280 billion per year textile exports.

Companies doing business in China are in a scramble to adjust their operations and specific industries are noting shocks.  American exporters of agricultural products and machinery are already feeling the effects of the slowdown, as China struggles to keep food supply chains open in the face of quarantines and declining consumption.  West Coast port traffic is already reporting a significant decline in traffic. Other notable examples include the cruise ship industry and tourism in general, beset by virus outbreaks on ships and growing travel restrictions. In addition, the luxury goods industry, which enjoys popularity among wealthier Chinese consumers and tourists, is projecting a $40 billion decline in sales in 2020.

The Coronavirus outbreak highlights the need for international companies to engage in a range of contingency planning to anticipate how to adapt business operations in the face of risks such as public health crises, natural disasters, energy shortages, slow or broken lines of communication and political risk.  An entire field of business continuity planning encourages companies to regularly assess operational and financial risk by actively planning and developing working contingency plans.  Proper insurance coverage, just one aspect of this, is crucial so that cash flows and financial obligations can be protected, even in the case of unforeseen breaks in trade.

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop trade credit and political risk transfer solutions that protect businesses from buyer non-payment and geo-political risks.  As a specialty independent brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of their client.

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Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100