Jury Duty

Jury Duty

I got called for jury duty this week. My number was so high that there wasn't much chance of my being chosen, but I got interested in the case -- a contract dispute -- so I came back for the last three days to watch the trial. I'm curious what you guys would have made of the situation.

Big Company leases oilfield tools to Pemex, the Mexican government-operated oil exploration and production company. Big Company has no employees in Mexico; its only assets there are the equipment it has leased to Pemex. Little Company is Big Company's agent in Mexico.

The agency agreement between Big Company and Little Company is fairly short. It deals mostly with the calculation of commissions on leases. It also provides, however, that Little Company will take measures to ensure that Big Company stays in compliance with Mexican law. Furthermore, it provides that Little Company will pay all of its own costs and expenses of acting as agent.

Little Company develops contacts with Pemex and generally sees to it that Big Company is complying with a variety of local requirements, including all the stamps and fees that are involved in moving all these products across the border. In this connection, Little Company signs a document assuring the Mexican government that it will be responsible for any violation of Mexican law by Big Company. Big Company does not sign this "guaranty" document and in fact may not even be aware of its existence.

Pemex leases some huge tools from Big Company that are needed to install wellheads on the sea-floor in the Gulf of Mexico. Pemex uses the tools only once per well and doesn't need to keep them in its own inventory, but it does need to keep them long enough to complete each well. Mexican import/export law contains an exemption from customs taxes for equipment that comes into the country for short periods not to exceed six months. Sometimes, however, Pemex needs to keep the tools offshore more than six months. One of Little Company's employees in Yucatan is a good "fixer" who stays friendly with Pemex. He typically persuades Pemex to bring each tool back from offshore within six months, even if that means just putting the tool on a big semi and sending it back across the border into Texas briefly, before it goes right back into Mexico and back offshore until the wellhead is finished. Unfortunately, the fixer dies suddenly, and the only guy left in that division is an engineer who, despite his skill at explaining the product, doesn't really know all the ropes about the import/export dance. In fact, no one else in Little Company, including its big brass in Mexico City, really has this dance on his radar screen at all. Back in the U.S., Big Company has never paid much attention to the issue, because things always went smoothly before.

Suddenly an alarm goes up. Someone -- perhaps a government official or a Pemex employee -- alerts Little Company that a couple of tools have been in Mexico more than six months. The Mexican tax authorities are raising a stink: your exemption isn't good any more, pay those import taxes! After a brief scramble, Big Company gets its tools back from offshore and brings them back by truck across the border to Texas without incident, paying a late fee to the customs authorities there. Big Company then gets underbid on the next few Pemex projects that come up, and stops doing business in Mexico.

The Mexican government, however, isn't finished with Little Company. It sues Little Company for some amount that Big Company may still owe, for unexplained reasons. The amount sought is vastly greater than the late fees Big Company paid at the border; in fact, it's nearly as much as the two giant tools were worth, almost $600,000 total. The Mexican government seizes Little Company's rather meager office assets indefinitely. What's worse, it blacklists Little Company's two main guys, preventing them from bidding on any Pemex business or even talking to anyone at Pemex. Little Company tells Big Company what's happening. Big Company sends all the information it has, showing that Big Company brought the tools back over the border as soon as it could get them back from Pemex, and that Big Company paid the late fee at the border.

Over the next five years, Little Company doesn't manage to sell any products to Pemex. The blacklisted principals in Little Company move all of its employees to some other affiliates, but those affiliates don't sell anything to Pemex, either. This may be because the affiliates lack the services of the principals, but there is some evidence that the blacklist applies to the principals only in connection with some of the affiliates, not all. Little Company claims that, although it had never actually sold anything to Pemex before, it had made some impressive demonstrations to Pemex officials and was on the verge of making some great sales when it was shut down. Little Company therefore claims it lost several million dollars in profits over the five-year period after the seizure and blacklisting. At the end of that period, the Mexican tax authorities quit chasing Little Company, but it's still not clear why they sued in the first place, or why they stopped, or whether they might start again.

Back in the U.S., we get to the lawsuit I sat through this week. Little Company sues Big Company for breach the agency agreement, arguing that Big Company violated Mexican law and then left Little Company to face the wrath of the Mexican authorities alone. Little Company asserts that the agency agreement requires Little Company to pay only its own expenses, not those of Big Company. It follows, therefore, that when Big Company failed to pay its own expenses and Little Company got hit up for them instead, that was a breach of the agency agreement.

So who wins? What facts are left out that you'd want to know more about before you could decide?