Guarantees provided by parent companies are a common type of support in a wide range of commercial transactions. Besides the usual commercial considerations that need to be taken into account in deciding whether or not a guarantee is an acceptable mitigation of counterparty risk or default risk, in the case of a guarantee given by a parent company domiciled or registered overseas, there are additional risk factors that need to be considered.
What are the risks of accepting a foreign parent guarantee?
If you are considering accepting a guarantee from a foreign parent company there are a number of important matters to take into consideration:
· Which jurisdiction do you want to apply – Australia or the jurisdiction of the foreign parent company?
· If a judgment is obtained will you be able to enforce that judgment in the country where the assets are located?
Which jurisdiction will apply?
When drafting a guarantee involving a foreign parent company, it is very important that the contract is clear as to which governing law and jurisdiction will apply:
· Governing law refers to which country’s substantive law will be applied when deciding the obligations and rights of the parties to the contract.
· Jurisdiction refers to which courts of any named country are authorised to hear any dispute under the contract. Jurisdiction may be either:
– exclusive, restricting the bringing of any action to a specified court that has the requisite jurisdiction to hear the dispute; or
– non-exclusive, allowing the parties to commence proceedings in the named court or to bring proceedings in an alternative jurisdiction.
Non-exclusive jurisdiction clauses afford the most flexibility and allow parties the option to either bring proceedings in the jurisdiction specified in the guarantee (or other contract) or in another jurisdiction, which may include the jurisdiction where the foreign parent guarantor is located.
Enforcing a foreign judgment in Australia against a foreign parent company
Whether a judgment obtained against a foreign parent company outside of Australia can be enforced in Australia will depend on the type of judgment that has been obtained and where the judgment was issued.
Currently, the enforcement of foreign judgments in Australia is governed by both statutory regimes and common law principles.
The Foreign Judgments Act 1991 (as read in conjunction with the Foreign Judgments Regulations 1992) is the statutory framework existing in Australia with regard to the enforcement of judgments obtained outside of Australia. It specifies the procedure and scope of judgments that can be enforced by statute in Australia. In order to be able to register and enforce a judgment in Australia against a foreign parent company from a superior court of an overseas country under the Foreign Judgments Act 1991 (Cth), the country in question needs to be listed in the Regulations to that Act.
In addition, Australia is a party to a bilateral treaty with the United Kingdom which provides for the Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters 1994.
Importantly Australia is not a party to the Hague Convention on Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters 1971. Therefore, unless there is some other treaty, convention or domestic law governing the enforcement of foreign judgments, the courts in other countries are not necessarily obliged to recognise or enforce judgments given by Australian courts.
In instances when there is no international or statutory agreement, the foreign judgment must be enforced under common law principles.
Enforcing an Australian judgment overseas against a foreign parent company
In general terms, judgments obtained by Australians court are only enforceable within Australia. This is because the enforcement of the judgments of Australian courts outside Australia would breach the sovereignty of other countries.
If proceedings against a foreign parent are commenced in Australia, and a judgment is thereafter obtained against the foreign parent, this will put at risk any assets that the foreign parent may have in Australia. If the foreign parent has no or insufficient assets in Australia to satisfy the judgment, then the plaintiff will need to take action in the defendant’s jurisdiction, either by commencing entirely new proceedings or seeking recognition of the Australian judgment. However, even if the Australian judgment is recognised. It is possible that the foreign court may not grant the same form of relief as granted by the Australian court.
The Foreign Judgments Act 1991 also provides a procedure to facilitate the enforcement of Australian money judgments outside Australia. Under this Act, and on application by a judgment creditor, an Australian court is required to provide certain certified documents, including a certified copy of a judgment in order that the judgment creditor may attempt to enforce that judgment outside the jurisdiction. The certified copy of the judgment will only be provided where the judgment creditor is seeking to enforce the judgment in one of the foreign jurisdictions to which the Act applies.