In today’s globalized world, cross-border contracts are commonplace in many industries—and they require specialized knowledge, skill, and expertise. Potentially vast differences in language, laws, and legal and business environments require that unique approaches need to be utilized with respect to drafting and negotiating international contracts. The team at Lex Moderna discusses in this post some special elements to consider when engaging in cross-border deals.
Negotiation and Contracting Practices
Parties must be attuned to the legal and business cultures of the countries of the parties with whom they are negotiating and contracting, including the following aspects:
The Culture of Negotiation
The culture of negotiation may be wildly different when dealing with parties from other countries. Depending on where the parties come from, there may be an expectation of a significant amount of small talk, in-person meetings and hosting obligations, strict hierarchical norms, and differences in how forthcoming the parties are in expressing what they think or mean during the negotiation process.
Pre-Contracting Obligations
In some countries, contractual obligations may arise prior to execution. Systems vary with respect to recognizing and regulating a party’s obligation of good faith negotiation. In some jurisdictions, courts may find binding obligations to arise prior to finalizing a formal agreement.
Civil Law Versus Common Law Approaches to Contract Drafting
When parties to a contract come from both civil and common law jurisdictions, they may have different views about what a contract should look like. In civil law traditions (presumably because codes address issues that are routinely addressed in common law agreements) contracts tend to be shorter than in common law jurisdictions and have fewer contingencies. These differences in perspectives and expectations need to be managed in international negotiations.
Contract Formalities
When engaging in business with parties from other countries, there may be contracting formalities such as requirements of a corporate seal, original signatures, and the like.
Jurisdictional Issues
Governing (Choice of) Law
International contracts should include a choice of law provision to establish the law of the country (or state, if the U.S. is chosen) which will govern the contract. Legal regimes associated with the contracting parties may vary significantly, making the governing law an important strategic decision, one that will save the parties from inordinate delay and expense should a dispute arise.
Dispute Resolution Mechanism(s)
International agreements should specify the dispute resolution mechanism(s) to be used in the event of a dispute arising under the contract. Such a provision, for example, might include the requirement of a good faith attempt to negotiate a dispute for a specified period of time before resorting to litigation. Arbitration clauses are common in international contracts. Depending on the jurisdiction, however, the clause may not be enforceable or the arbitration proceedings may not be binding.
Forum Selection
Parties to an international contract should specify which court will decide a dispute arising under the contract. Such a provision may be exclusive, non-exclusive, or unilateral. As with the governing law, decisions related to forum selection are critically important and should be made with intentionality. Accepting a foreign jurisdiction may have serious consequences with regard to the legal costs relating to proceedings, the timing and duration of proceedings, and the enforceability of the judgment, among other things.
Contract Language
English is the lingua franca of international business and parties from different countries often use English as the contracting language. This is true even if none of the parties is based in a country in which English is the official or predominant language.
Parties might consider including a provision that the parties waive the right to claim the contract is invalid because it is in English or entering into a dual-language contract, with English as the governing language (an approach that raises its own cost and interpretive challenges). It is unclear whether courts in all jurisdictions would uphold such a provision; as an example, some years ago, an Indonesian court voided a contract on the grounds that it was not drafted in Bahasa Indonesian under that court’s interpretation of Indonesian law.
Anti-Corruption Provisions
Under the U.S. Foreign Corrupt Practices Act (“FCPA”), U.S. persons (including corporate entities) and some foreign companies are prohibited from making payments to foreign government officials to assist in obtaining or retaining business. Because such payments are common in some cultures, international business contracts should include provisions prohibiting the parties and any subcontractors or suppliers from making “prohibited payments” under the FCPA and other anti-corruption laws. Such provisions may expressly allow for contract termination in the event of a violation of this provision.
Payment Matters
Payment terms are key considerations to consider when contracting internationally. For example, the contract should indicate how payment will be made, the currency in which payment will be made, how currency conversions will be made, interest rates for late payments, and a host of related considerations.
Confidentiality Provisions
Because of varying disclosure norms across countries and regions, parties to an international commercial contract should be precise in defining the scope and nature of contractual confidentiality duties.
We Can Help
These are just some examples of the many ways in which international contracting can differ from domestic agreements. In some situations, given the vastly different legal and business cultures globally, it may be advisable to retain local counsel. Knowing when to do so, who to choose, and how to structure and manage local counsel relationships can be critical to the success of the agreement.
Contact the team at Lex Moderna if you would like advice in drafting or negotiating international commercial agreements. We have substantial experience and expertise in these matters. We also have attorneys across jurisdictions to ensure that your cross-border contracts meet your expectations and are executed efficiently.