26 January 2015

Avoiding disputes in cross-border contracts: key negotiating points

Effective negotiation of contractual terms is one of the best ways to minimise the risk of disputes.  Failure to address key issues before entering into a contract can exacerbate disputes if and when they do arise, particularly in an international context. Certain terms, such as governing law and jurisdiction, may appear of little importance  to non-lawyer negotiators but can fundamentally affect the ability to obtain a remedy in the event of default by the other party. In this article we discuss key contractual terms which should be considered during negotiations for cross-border contracts.   

Language

Whilst many international companies are able and willing to communicate in English, it is unlikely that they will be fluent, particularly in relation to complicated technical or legal language.  In order to avoid any ambiguities or misunderstandings, you should seek to agree an authoritative language and provide that, where the contract is translated into another language, the contract (and any notices served under the contract) in the authoritative language takes precedence.  In many cases you will be able to agree that English is the authoritative language. If any other documents are required to be translated, you will need to consider whether provision should be made for the document to be notarized or similar to be enforceable.  If there are any terms which appear ambiguous, we always recommend that these are specifically addressed and clarified before the contract is executed.    

Governing Law

What law will govern the interpretation of the contract?  This can have a significant effect on the parties’ rights and remedies under the contract.  One law may give effect to a particular clause, whilst another law may find it to be unenforceable.

If the contract is silent, the Court in which any dispute is raised will follow its own procedure for determining the governing law.  In the EU this will usually involve the application of Rome I (the Rome Regulation on the law applicable to contractual obligations).  Although it may be possible to predict what the courts may hold to be the governing law, this can still leave uncertainty and scope for satellite disputes.

It is therefore advisable in almost all international contracts for the parties to agree the applicable law and ensure that the choice is expressed clearly in writing.

Jurisdiction

Which body will determine any disputes arising out of the contract? This choice will have a significant practical effect on the outcome for your company in the event that a dispute arises.  The additional cost, time, language and travel pressures of conducting litigation in a foreign country may mean that for practical reasons, your company is unable to obtain the relief it would be entitled to.

You should also consider whether disputes should be referred to the courts at all, or whether it would be appropriate for the parties to agree to arbitration.   Arbitration is common in major cross-border contracts and offers three potential advantages over referring disputes to the courts: firstly, most countries will recognise and enforce arbitral awards without any further proceedings being required; secondly, the arbitration process is also seen (perhaps unjustly in many cases) as a fairer way to resolve disputes, without either party having “home advantage”; and thirdly, arbitration may be well suited for dealing with particularly complex technical issues.  On the other hand, arbitration can be as timely and costly (if not more so) than Court proceedings, and cannot offer the parties urgent interim remedies such as injunctions.

In many cases, it may be preferable for the Courts of England and Wales to retain exclusive jurisdiction, if this can be agreed.

Force majeure

This boilerplate clause is often overlooked. However, in international contracts force majeure clauses take on an increased important because, put simply, there are more things which can go wrong.  Natural disasters and conflict may well occur and affect the other party’s ability to comply with the contract, either directly or indirectly.  You should consider the contract in light of the environmental and geopolitical context and ensure that your force majeure clause adequately deals with any issues which are likely to arise.

Payment

You should consider how best to protect the position as regards payment.  If providing goods or services, you may push for payment (or part payment) in advance.  You can also consider trade finance options such as performance bonds and guarantees or letters of credit, which use a third party to provide a level of security.   The cost and complexity of these schemes need to be balanced against the risk of non-payment.

On a practical level, you should ensure that the contract clearly deals with the mechanism for payment.  What currency is to be used? What exchange rate will apply and how and when will it be calculated (i.e. who will bear the risk of fluctuations in currency)? How should payment be made?  Does the contract take account of any administrative delays in processing international payments?

Shipment of goods

If the contract involves shipment of goods, you will need to ensure that adequate consideration is given to questions of shipping, including title/insurance and import/export regulations.  What route will the goods take? What documents will be required for them to be delivered? Who will bear the risk if the goods are damaged in transit? Who will be responsible for obtaining import/export licences and clearing customs? Consideration of these details is outside the scope of this article but the key message is that you need to understand the commercial transaction taking place and consider how the practicalities of that transaction can be addressed in the contract with a minimum of risk.   

Summary

On one hand, an international contract is no different from any other contract you enter into.  It should be a document which clearly sets out the intention of the parties in relation to the proposed transaction.  At the same time, it is important to recognise that international contracts give rise to a number of issues which, whilst present in a domestic context, may provide significantly increased risks.  Careful consideration of these issues both before and during negotiation is required to ensure that the risks are minimised.

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About the Author
Elizabeth Beatty, Partner
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