1. Company A is a UK registeredcompany which has assets in the UK, the US and France. It contracts with CompanyB to supply Company A with telecoms hardware. Company B is a Hong Kong SARregistered company, but a wholly owned subsidiary of Company C which isregistered in the PRC.
2. Company A installs software andthen sells the hardware plus the software as the ‘finished product’. 50% of thehardware has already been delivered, and payment is due.
3. In this case, Company A hadentered a separate contract with the government of Country D to provide thefinished product for government use. It had also made a further separateagreement to maintain and service the finished product for a period of 10years.
4. If the contract to supplycountry D had been successful, Company A has plans to deliver similar finishedproducts to other governments in the region.
5. The contract contains anarbitration clause that all disputes arising under the contract shall begoverned by and interpreted in accordance with the laws of New York, withoutregard to principles of conflict of laws. The parties agree to submit alldisputes arising under the contract to arbitration in New York City.
6. The president of Country Dbecomes very ill and the Vice President takes control and dismisses allministers and heads of government department. By presidential decree heannounces that all government procurement contracts are void and must beretendered.
7. The USA refuses to recognisethe new government and imposes unilateral sanctions prohibiting any tradingwith the government.
8. Company A has completed thepreparation of 50% of the finished product, but it is advised that it cannotdeliver it to Country D because of the US sanctions. Without payment for thefinished product Company A cannot afford to pay Company B.
9. Not only is payment now due forthe initial 50% of the hardware as supplied, but Company B has alreadymanufactured the remaining 50% of the hardware and has it ready for delivery onthe due date next month.
10. Company A purports to rescindthe contract with company B and says it will not accept the forthcomingdelivery of the remaining 50% of the hardware of while offering to return theprevious delivery.
11. Company A claims that it hasrecently discovered that the hardware was not compliant for the purposes of theinstallation of the software and this was a fundamental term of the contract.Company A asserts that it is entitled to compensation.
12. Company B refuses to accept thepurported rescission of the contract. It instructs lawyers and threatens legalaction.
Note on Law.
13. Please note, this mockmediation exercise does not turn on any point of law and it is not necessary toreach any conclusions about any particular legal course of action remedy.
14. The potential exposure topenalties imposed by the US in accordance with its unilateral sanction ontrading with the government of Country D is a likely to provide a defence inEnglish law to nonperformance of contract.
15. The change of government in countryD does not affect contractual obligations of the parties and English law and isunlikely to provide a defence of frustration.
16. Last week, by coincidence, newgovernments were installed in both the USA and Country D.
Company A’s Summary to theMediator.
17. Company A makes this statementfor the purpose of the mediation and makes it clear that it does not waive anyconfidentiality or privilege of any kind in relation to and fact or matter or statementsmade or disclosed in the course of the mediation.
18. Company A states that it isunclear about the status of this proposed mediation and whether it will bebound by any eventual agreement.
19. Company A has requestedevidence of that Company B will abide by any settlement agreed in the mediationand is concerned that Company B, although a Hong Kong SAR registered company,only has assets located in the PRC.
20. The contract was entered intoin good faith. It would have been highly profitable for all parties.
21. The change of government andits new policies could not have been anticipated nor could the imposition ofthe unilateral US sanctions.
22. The claimed recession isappropriate given that it is become impossible to perform the contract withcountry D. It would have been illegal to perform the contract and exposed CompanyA to US penalties.
23. Company A accepts that itreceived the first consignment of the hardware and accepts that it convertedthem to the purpose of the contract. It also accepts it has not paid, but isnot in a position to pay because its purchase was predicated on payment by CountryD for the finished product. It does not have sufficient funds to pay and willbecome insolvent if sued for the contract price. Its only real asset is itsParis headquarters.
24. Company A claims compensationbecause it alleges that the hardware was not compliant in accordance with thecontract so as to enable the installation of the software. Significant andexpensive changes will have to be made to the software and these will take timeand so the finished product could not be delivered on the contract date toCountry D.
25. Company A says that all ofthese matters are beyond its control and it should not suffer as a result.
26. Company A is concerned that anypublicity about this matter will cause its business to fail in any event andwishes there to be strict confidentiality in relation to any mediation or itsoutcome.
27. Company A had entered into acontract with a local software agent to carry out its maintenance contracts incountry D. It is now being threatened with legal action under this contract andsays that it will join Company B as a defendant to any such case.
Company B’s Summary to the Mediator.
28. Company B be will berepresented by the directors and lawyers of its parent company, Company C,registered and based in the PRC.
29. Company B and its parentcompany, Company C, declines to provide any evidence about assets or how anysettlement agreement it might be funded if it is not in their favour. Companybased says this is unnecessary as is no possibility of any liability on itspart.
30. Further, company B says it isnot able to enter into any confidentiality agreement because this is notpossible under its local law.
31. Company B states that, althoughit has agreed to mediation, this mediation and any settlement has no statusunless it is incorporated into an arbitral award which is verified by its localcourt.
32. Company B states that problemsarising between Company A and Country D are nothing to do with this contractand cannot affect the parties respective liabilities. However, Company C has recentlydiscovered that Country D rejected the contract to receive the finished productbecause the agent who negotiated it was a cousin of the President, and noconflict of interested been declared.
33. Company B claims payment infull for the 50% of the hardware already delivered and the remaining 50% whichis now ready for delivery. Further, Company B claims that Company A maderepresentations during the negotiations for this contract that it already hadentered into agreements with various other countries in the region to supplythe same finished product. In reliance on these representations, company becaused its factories, which are located in the PRC, to tool up for a full 18months production of the hardware.
34. Company B asserts that it maybe subject to a claim by Company C in the PRC, and it will join Company A as adefendant.
35. If Company B is not paid infull it will publicise these matters.