Whether you work in oil service, upstream or midstream, the international petroleum industry presents complex commercial risks that need to be carefully mitigated. Deals in this space are predominantly commercial animals; far more so than any other area of practice we have encountered. In places where the arbitrary exercise of power is common and the rule of law is circumvented or absent altogether, the top risks are usually financial, technical and operational – and not legal.
And yet, many lawyers stepping into international deals have difficulty stepping out of the lawyer box. Failing to do so can be a narrow, and even a naïve approach, to dealmaking in non-rule-of-law countries.Things are further compounded by cultural nuances. In Western culture, a signed contract is the culmination of a successful negotiation. In many other cultures, a signed contract is merely the start of a commercial relationship that will evolve over time.
In non-rule-of-law countries, these cultural practices are the logical consequence of the unreliability of legal protection. Without stable laws, applied consistently to both State and industry, it is risky to rely solely on contractual protections. It will then come as no surprise that businesses in non-rule of law countries do not necessarily look to lawyers to drive deal making or risk protection.
Consider a few techniques:
Assist clients with comprehensive risk-reward diligence.
Lawyers should help their clients engage in strenuous risk-reward diligence for all known risk factors relating to the deal or the project, not just legal risks. Clients will not necessarily identify those risks or mitigants on their own. This diligence should happen before the start of negotiations. While the cultural nuances of effectively communicating with a foreign counterpart is challenging enough, changing tack mid-negotiation to address an overlooked risk item may not be practically possible
Focus on practical outcomes.
Problem solving should always focus on practical outcomes. Consider what commercial structures are available to mitigate the risk. For example, the legal niceties of an indemnity in a China joint venture contract are irrelevant compared to the credit risk of payment under that indemnity. If the counter party does not pay – the indemnity is worthless. Instead of negotiating the indemnity language, explore additional security, or financial set-off or the loss of key contractual rights where the indemnity has not been paid.