24 October 2014

Key issues in cross-border contracts

Globalisation and advances in technology mean that international contracts both within and outside the EU are becoming the norm (and in many cases a necessity) for many companies in England and Wales. Whilst the internationalisation of the market offers exciting opportunities for growth, it can also bring increased risks for contracting parties. This article provides an overview of the key issues which in-house counsel should consider to minimise risk.

The issues set out below reflect a number of key aspects to consider in cross-border contracts.  Depending on the type and value of contract in question and your attitude to risk, some issues may be more or less relevant than others. As a matter of good practice, it is worth considering each issue at an early stage, even if it is simply to highlight the risks in entering into the contract.

Before negotiations begin

When dealing with a company within the UK, it is relatively easy to form a view as to the strength of the business and any risks posed by entering into a contract with it. Details of directors, shareholders and the company’s annual accounts are readily available from Companies House for a small price and information about its interests in property can be ascertained from the records of the Land Registry. There is also access to credit checking facilities such as Experian or Creditsafe. The business in question may also have a good (or bad) reputation within the industry.

The ease with which this information can be obtained if required (together with a familiarity with the litigation process in England and Wales) may mean that a party is willing to forgo a detailed due diligence procedure at the outset of a relationship (although best practice would advise against this).

The case can be very different when dealing with an international business. It may be difficult to obtain accurate information about that business and, if you have left it until a problem arises with a contract, it may well be too late.

The key is to carry out due diligence on the business before you enter into formal negotiations so that you can form a view about the risks of dealing with that business before you become involved.   In practice, this will not always be easy as you may be under commercial pressure to press ahead with the contract. However, in-house counsel should seek to be involved at an early stage in any potential new international relationship. Early input may provide significant benefits later in the relationship.

Know the other party

The key principle is to know who you are dealing with. What is the legal status of the business? Does it have limited liability? Where is it based? Does it have any assets? Is it solvent? International credit rating companies such as Dun and Bradstreet may be able to provide a concise summary of this information at a relatively low cost.

If this is not available, or if the contract in question is of a high value, you may wish to instruct local solicitors to provide a report as to the status and financial position of the business. If, despite your enquiries, you cannot obtain satisfactory assurances about the business, this should be flagged up as a significant risk. If you wish to push ahead with the contract, you may consider asking the business to provide formal assurances about its financial position or negotiate favourable payment terms (see below).

Know your contact

As part of the due diligence exercise, it is important to confirm the status of your point of contact with the business in question. In many cases and for a variety of reasons (not least language), international business may conduct negotiations through a third party or agent. Before you start negotiating terms, you should establish whether your point of contact is authorised to represent the business and sign a contract on its behalf. In some cases, you may wish to require formal confirmation such as an extract from the business’s registers or a written certification from the company.

Know your duties

In certain jurisdictions (particularly civil law jurisdictions such as Germany), parties’ pre-contractual negotiations can give rise to binding legal obligations, such as a duty to negotiate in good faith.   Such concepts are unfamiliar to businesses in England and Wales and can lead to some unexpected claims.  Before negotiations begin, you should investigate whether the company will be exposed to any potential liabilities as a result of the process of negotiating, even if no binding contract is reached. Again, subject to the value of the contract, you may wish to seek advice from local lawyers.

Know the transaction

Depending on the subject matter of the proposed transaction, a number of issues may arise which will not necessarily be covered under the company’s standard template agreements or terms and conditions, but which need to be negotiated and reflected in the contract. Whilst you are not expected to be an expert in the technical elements of the business, you will need to have a basic understanding of the technical requirements and understand what issues may arise from these requirements in an international context. Identify the appropriate individuals within your company and discuss the technical requirements of the proposed transaction with them before the negotiating process begins. For example, if you are shipping goods from overseas, do they need to be kept in a specific environment in transit? If so, you will need to ensure that this is covered in the contract.

You should also consider any issues that may result in reputational damage or even criminal liability.  For example, there have been numerous reports of use of child labour in developing countries, historically in the clothing industry but more recently in more high-tech industries. Is there a risk that your proposed contracting party (or someone in its chain of suppliers) is using child labour? The damage to reputation if allegations of child labour are raised could be devastating.

As another example, if shipping goods from certain countries is there a possibility that ‘facilitation payments’ will be expected when goods cross a border?  If so, a party may find itself facing corporate criminal liability under the Bribery Act 2010. You will need to anticipate all the issues which may arise as a result of the transaction and ensure that terms are negotiated to provide protection as far as possible.

Keep it confidential

Finally, you should consider the question of confidentiality. You may be disclosing confidential information during the course of negotiations and there is always a risk that the other party could make unlawful use of that information. Once confidential information has been disclosed, it may be difficult if not impossible (and almost certainly very expensive) to prevent its unauthorised use on the other side of the world.

Whilst there will always be some risk in disclosing confidential information, you may wish to require the business to enter into a confidentiality agreement with a liquidated damages clause for unauthorised disclosure of confidential information. You should of course ensure that confidential information is only disclosed if strictly necessary and only to the extent necessary.

The contractual negotiations and key terms

Once you are satisfied that you have obtained sufficient information about the proposed contracting party (or that you have identified the information you do not know and a party is prepared to risk proceeding on this basis), the contractual negotiations may begin. Below is a brief summary of key contractual terms which should be considered. In many cases, these will also be relevant to domestic contracts, although the added risk of international business may mean that failure to consider certain terms poses a much greater risk.

Once again, whilst in an ideal world you would be involved throughout the negotiations, the reality is that you may only have limited input in negotiating the key terms, or you may only be involved by at a late stage in the negotiations. In these cases, it is important that all those involved in the negotiations understand the importance of the terms below and the potential repercussions. Certain terms, such as governing law and jurisdiction, may appear entirely unimportant to non-lawyer negotiators but can fundamentally affect the ability to obtain a remedy in the event of default by the other party.

Language

Whilst many international companies are able and willing to communicate in English to a certain extent, 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 at the outset of the negotiations 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 the event of any ambiguities.

In many cases you will be able to agree that English is the authoritative language. If not, it may be worthwhile to engage an established translation agency to provide an accurate translation of the final contract. 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, these should be specifically addressed and clarified before the contract is executed.

You should also be sensitive to any difficulties experienced by any international parties who are negotiating with you in English. Whilst it may be tempting to take advantage of their limited understanding to force through favourable terms, this may ultimately hinder negotiations. If you can show that you are accommodating language difficulties and make efforts to clarify any difficult clauses, you may earn valuable goodwill with your negotiating contact.

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 advisable in almost all international contracts for the parties to expressly agree the applicable law. As a general principle of international law, the courts are willing to give effect to the parties’ express choice (subject to some restrictions). You should ensure that the choice is expressed clearly and unambiguously in writing.

Generally you will wish to agree that the law of England and Wales will govern any contract you enter into, and in many cases because of the worldwide reputation of the English and Welsh legal system, the other party may agree to this. However, if the other party insists on its own law or a ‘neutral law’ it is essential that you understand the consequences of such a choice. This is likely to mean that you obtain expert advice, usually from local lawyers, on how the proposed contract would be interpreted under the chosen governing law.

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 client 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, the business is unable to obtain the relief it would be entitled to.

Again, in the absence of an express choice, the courts will follow their own rules for determining whether they have jurisdiction to hear a case. Significant problems can arise where proceedings are issued in more than one court. Which will take precedence? This can lead to significant satellite litigation. In the so-called “torpedo” cases, parties have deliberately issued proceedings in a particular court with the sole aim of preventing (or at least significantly delaying) the case proceeding in the other party’s preferred court.

The advice is to expressly agree the jurisdiction unambiguously and in writing in the contract. In the majority of cases and subject to certain exceptions, the courts will enforce the parties’ choice. In the event that a single jurisdiction cannot be agreed, it is possible to agree split jurisdiction clauses where, for example, each party can issue proceedings in its preferred court. However, such clauses should be approached with caution. The more complicated the clause is, the more scope there is for disputes to arise as to its application.

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 two potential advantages over referring disputes to the courts: enforcement and neutrality. The New York convention, to which 148 countries are signatories, provides for the international recognition and enforcement of arbitral awards. The arbitration process is also seen (perhaps unjustly in many cases) as a fairer way to resolve disputes, without either party having ‘home advantage’.

Some businesses also like the fact that arbitration proceedings are private (and often confidential) and can offer a level of understanding of technical issues which cannot be matched by the courts in some countries. On the other hand, the fact that proceedings are private means that third parties cannot be joined to the arbitration, and interim remedies such as injunctions are not available. The procedure can also be just as complicated, time consuming and costly (if not more so) than litigation through the courts.

Careful thought should be given as to whether arbitration is appropriate.  It may be preferable in many instances for the courts of England and Wales to retain exclusive jurisdiction, if this can be agreed. If you intend to agree to an arbitration clause, you should ensure that you have investigated the procedure which your chosen arbitrator will use (i.e. does it have its own binding rules?) and (if applicable) ensure that you give consideration to questions such as confidentiality and disclosure.

It is often advisable to use the recommended standard wording of your chosen arbitrating organisation. If you are concerned that interim relief (such as an injunction) may be required, consider providing a carve out so that the parties are entitled to refer any interim issues to the courts without prejudice to the jurisdiction of the arbiter.

Force majeure

This boilerplate clause is often overlooked. Many lawyers will have a standard wording and stick to it. 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.  It may be appropriate to make specific amendments to your standard wording or create a bespoke clause.

Payment

As a result of your pre-negotiation investigations, you may have concerns about the other party’s finances. 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, which means that the pre-negotiations investigations into the other party are essential.

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. Depending on the method of shipment, it may be appropriate to contact a specialist insurance broker.

In many cases, a contract which involves the international transport of goods will specify that it is subject to Incoterms or other standard trade terms. These terms are internationally recognised and deal with all of the key issues arising from the shipment of goods, so it may be beneficial for them to be incorporated into the contract. If you intend to rely on these terms, you must ensure that the version of the terms to be used is clearly identified and properly incorporated into the contract. You should also ensure that you have read and understand all incorporated terms and that there are no conflicts with other agreed terms of the contract.

Summary

On one hand, an international contract is no different from any other contract your client enters 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.

If you have any queries in relation to this briefing then please do not hesitate to contact Elizabeth Beatty in our commercial litigation team at ebeatty@hcrlaw.com

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Elizabeth Beatty, Partner
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