Legal Briefing

Scottish contracts: key pointers for in-house counsel

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Finance | 01 February 2015

In Scotland, we have had the benefit, and in some cases experienced the challenges, of more than a decade of market globalisation. On the whole this has been a very positive trend that has presented tremendous opportunities for those who have spotted the potential for business growth in new markets and have invested accordingly.


Scotland’s export track record is strong, with the energy (both oil and gas and renewables) and food and drink sectors faring particularly well in recent years. Scotch whisky sales alone, which account for approximately 85% of Scottish food and drink exports, were worth £4.3bn in 2013, according to the most recent full-year figures. The oil and gas sector, through supply chain and overseas subsidiaries, generates some £11bn a year for the Exchequer, while the renewables sector currently employs 11,000 people across Scotland. Overseas investors, contractors involved in installation, supply and subsequent maintenance, as well as overseas parent guarantors are often involved in these complex renewables projects.

Most businesses in these sectors will deal with overseas entities on a regular basis, be they investors, contractors or even parent guarantors, but have they properly protected their rights and ensured that customers, suppliers and borrowers will comply with their obligations?

GETTING YOUR DOCUMENTATION RIGHT

So, how do you put yourself in the best contractual position? The following is a brief checklist to ensure you get the documentation right.

  1. Make sure the contract reflects the commercial terms. While this may seem obvious, it is not unheard of for contracts not to reflect the commercial terms in some aspect or other, or for the parties to have wholly disparate views as to the deal structure. As a result, contracts often fail to align to one party’s view. Pre-contract discussions should flush out this particular issue and it is necessary to cross-check the agreed position with the terms of the contract.
  2. For those operating from the UK, we would recommend the application of a governing law which is familiar to all parties. The choice of law can be important, particularly when matters become contentious. It is also prudent to consider forum shopping and relevant controls over jurisdiction in the contract. You may also want to consider, for certain types of dispute or contractual rights, arbitration rather than a court-based process, particularly if you value keeping your dispute confidential or preserving your relationship with the other side. It should be given serious consideration where you would otherwise find yourself in the national courts of a jurisdiction with which you are unfamiliar or uncomfortable, particularly where there is political instability or a record of judicial partiality in that country. Arbitration is flexible, confidential and allows parties to select a judge with suitable expertise to determine the issue. There are limited grounds for court interference in arbitrators’ decisions and no appeal to 
the Supreme Court. Parties can control costs by agreeing the extent to which 
the arbitrator can award costs against 
the unsuccessful party. There may be clear advantages in enforcing your decision, as arbitral awards are recognised far more readily outside the EU than UK court judgments.
  3. Enhance your remedies by contractual provisions. There are various ways in which this can be achieved. In Scotland, enforcement remedies can be accelerated and can be structured, where possible, to avoid court process by including certain provisions, such as a consent to register for preservation and execution, and warrants for summary diligence. Claims under contracts can be time barred. In some jurisdictions the form of document (for example if it is signed as a formal ‘deed’ or some informal writing) can affect the time limits for performance under contracts and for enforcing relevant claims. 
There is no equivalent to execution as a deed in Scotland (extending the usual three-year prescription period for English law documents). Generally, the prescriptive period on contractual obligations is five years in Scotland in any event, providing more time to enforce.
  4. Key operative provisions in the contract should be clear. If title is to transfer, then indicate when this is to happen, what conditions (such as payment of consideration) apply and under what circumstances consideration can be withheld. In order to best protect against the loss of title to goods before the purchase price is paid, purchasers will often provide letters of credit, under which their bank or a local bank in the seller’s jurisdiction agrees to pay the purchase price on provision of certain evidence (such as delivery of bills of landing in respect of shipped goods). The purchaser takes comfort from not having paid for the goods before they are delivered and the seller has certainty of payment of the purchase price, provided they are delivered.
  5. Think carefully about process agent provisions. The appointment of a local process agent in respect of an overseas counterparty is likely to make the service of process and related enforcement much easier. Following international service rules in respect of an overseas entity can be difficult and time-consuming if a local service agent has not been appointed. For example, service outside the EU can take many months and require the involvement of local legal advisers. This can be true even in circumstances where the overseas entity is domiciled in a country which is a party to a bilateral treaty or convention in relation to service of proceedings.
  6. It may be appropriate to obtain a local jurisdiction legal opinion. It is better to find out before parties are in dispute whether the courts in the relevant jurisdiction would recognise the express choice of governing law of the contract and whether any judgments of the UK courts would be recognised and enforced in the local jurisdiction without the matter having to be reheard in the local court.
  7. Consider taking security to support the obligations. Ideally this should be security over local assets. This may avoid having to go overseas to enforce security rights. If the foreign entity does not have a place of business or assets in Scotland, all is not lost. In those circumstances, it may be possible to structure your trading arrangements to ensure that assets only transfer once the consideration is paid (for example, under a letter of credit arrangement).

It is hoped that the above documentation checklist should ensure that the agreements entered into will keep all the parties happy. However, disputes do arise and it is important to consider, when entering into a contract, which jurisdiction would apply in the event of a breach.

WHY CHOOSE SCOTLAND AS A JURISDICTION FOR DISPUTES?

There may be many factors in deciding which jurisdiction for disputes should be applied in any given contract. Below are some of the advantages of using the Scottish courts.

  • Interim interdict. It can be quicker, easier and less costly to obtain an interim interdict (the Scottish term for an interim injunction) in Scotland than in England. These are available quickly and, in certain circumstances, can be granted without advance notice to the other party. There is no requirement to give contractual cross-undertakings as a pre-condition for interim interdict, and generally no need to file detailed witness statements, which can reduce costs.
  • Specific implement. In Scotland, the primary remedy for breach of contract is specific implement (specific performance), not damages. This remedy is also available on an interim basis. In certain circumstances it can be advantageous to be able to compel a counterparty to perform rather than having to rely on being able to quantify a damages claim.
  • No automatic discovery. There is no automatic discovery or disclosure of evidence. The scope of any discovery is usually narrow, optional and by application. This can offer significant time and cost savings.
  • Caveats. Caveats can be filed in the Scottish Courts to give parties advance notice of interim orders, such as interim interdicts, being granted against them in Scotland without notice. A registered caveat will give the party’s lawyers a short period of notice to appear in court and argue against the interim order being made. We recommend that all businesses that have offices or a business presence in Scotland should maintain appropriate caveats to avoid getting caught out by a surprise interim order. Caveats should be filed where there is any hint of a dispute with a Scottish connection.

However, litigation may not be sufficient when dealing with an insolvent counterparty.

WHAT IF THE WORST HAPPENS AND YOU NEED TO WIND UP YOUR BUSINESS IN SCOTLAND?

Scottish companies are wound up by the Scottish courts. However, it is also possible to wind up overseas companies in Scotland under Part V of the Insolvency Act 1986, subject to certain conditions being met. The rules in this area can be complicated and are, in respect of entities incorporated in member states of the European Economic Area, affected by their centre of main interests.

In secured transactions, what are the enforcement routes available in addition to formal insolvency process? While in some jurisdictions security can be enforced by agents such as administrators or receivers on behalf of the security holder, in Scotland fixed security is generally taken by a security holder and must be enforced by that security holder. The exception to that is the floating charge where, depending on the place of incorporation of the foreign company, and whether it has a centre of main interests in a relevant member state, you may be able to appoint an administrator or a receiver to enforce. The law in this area has been subject to piecemeal amendment over the past few years, resulting in some tortuous analysis being required to work out which enforcement routes exist.

The ability to enforce overseas security in Scotland is likely to be restricted. So, for example, an English law debenture may be sufficient to allow an administrator to be appointed in respect of a Scottish entity (depending on the terms of the debenture). Be wary, however. The security constituted by the debenture will generally not comply with Scots law requirements for a fixed security and, as such, may not be capable of being ‘enforced’ in Scotland.

By Bruce Stephen, 
head of banking and finance, Brodies LLP.
E-mail: bruce.stephen @brodies.com.