On the More Esoteric Dangers of Foreign Contracting

The construction downturn in the U.S., coupled with healthy growth and infrastructure spending in a number of "Second World" countries has led to a marked increase in foreign contracting by American contractors, including many who have little experience in the particular perils of foreign contracting. While many construction attorneys can rattle off a decent Top Ten list of foreign contracting problems and pitfalls, more esoteric risks do exist, and are realized more often than many of us think.

Submitted for your consideration: a story of radical upheaval, diplomatic about-faces, a thirty-year litigation over less than $3,000,000, and a judgment that may be incapable of being paid. Even the caption is ominous: Ministry of Defense and Support for the Armed Forces of the Islamic Republic of Iran v. Cubic Defense Systems, Inc., 665 F.3d 1091 (9th Cir. 2011). One cannot even get past the first two sentences of the case history without starting to shake one's head, as the reality of what the litigation must have been like sinks in: "In 1977, Cubic...contracted with the Ministry...for sale and service of an air combat maneuvering range for use by Iran's military. The Iranian Revolution resulted in nonperformance of the contracts." The background discloses that, in 1982, the Ministry commenced an arbitration against Cubic. That an award in the Ministry's favor was given in 1987. That the ICC made a final award in 1997, totaling $2,808,519 plus pre-award interest and arbitration costs of $60,000. That the U.S. federal district court in California confirmed the ICC's award in 1998. As hard as many of the other time gaps are to understand, why was 1998 not the end of it? Why was the award still being litigated 14 years later?

"Proceedings were suspended pending litigation over whether certain judgment creditors of Iran could attach the Ministry's judgment." (Id. at 1095.) And that pending litigation went all the way to the U.S. Supreme Court. Well, fine, you might say. If I was Cubic's attorney, I'd be okay with that. It doesn't cost my client anything to sit on the sidelines and watch others fight over who gets my money. Except that the award is subject to both pre- and post-judgment interest. And that interest has now been accruing (although, thankfully, not compounding) since 1977.

Once the question of who got the money was resolved (in 2002), Cubic argued that the judgment could not be confirmed under the New York Convention, because confirming an award in favor of Iran was contrary to the public policy of the United States. Cubic further argued that the judgment could not be confirmed, because U.S. law prohibits payments to Iran. With respect to the first argument, the Ninth Circuit invited the DOJ to submit an amicus brief on the question of whether the confirmation of the judgment would be contrary to the public policy of the United States. The DOJ said it would be just fine. As you might imagine, that was essentially fatal to that argument. As to the second argument, the Ninth Circuit drew a fine (but correct) distinction between the confirmation of an award, and the payment of an award. It also noted that U.S. law created a specific process for getting permission to make payments to Iran, rather than erecting an absolute barrier.

What does all this have to do with foreign contracting? It is a less than gentle reminder that the risk assessment process for foreign contracting, especially in Second and Third World countries, needs to be more detailed than an average project risk assessment. The Iranian revolution in 1978 was not unforeseeable. Iraq had its own revolution in 1968. In 1973, Afghanistan had seen a bloodless coup. The neighborhood was known to be restless. Further, the problem was not merely one of revolution. Cubic's essential problem was that, after the Iranian hostage-taking, Cubic (as an American corporation) was absolutely prohibited from performing military contracting for Iran, even if both Cubic and Iran would otherwise have been amenable to going forward. Cubic's breach of contract, therefore, was inevitable and unavoidable, a victim of global politics.

The events of the Arab Spring, and the more recent events unfolding in Egypt as this is written, remind us that nations, even well-established nations, can turn on a dime. U.S. foreign policy can move just as quickly. Those doing business at various times in Chile, Venezuela, and throughout Africa can attest that this type of volatility is not limited to Arab countries. Contractors experienced in foreign contracting are already familiar with national stability assessments and reviews of legal tradition in a host country. As more contractors traverse the globe chasing profitable projects, those contractors would do well to take a page from their more experienced competitors, and learn how to assess external project risk than cannot be effectively controlled once the project is underway.