by George Benaur and Ben Rozenshteyn
In the world of international business, there is no question that contracts play a critical role. True that much business is conducted without any written contracts, but such risky practice inevitably leads to disputes, lost business, debts and other problems down the road. As with domestic contracts, a written contract solidifies the terms of the deal between the parties, and ensures that each side has the same understanding of the terms of their agreement. But beyond merely papering the terms of the deal, an international contract requires specialized and nuanced drafting skills to ensure that the agreement is enforceable at a later date.
The issues surrounding international contracts form a rich landscape for legal practitioners tasked with negotiating and drafting clauses most favorable for their clients. The maxim of Nota Bene, or – take special notice – is particularly instructive within this legal realm. Deals resemble each other around the world, as does the language that expresses them. Still, the differences in legal and business environments require tailored approaches. It is therefore inadvisable to assume that a transaction would proceed in the same manner as within one’s home jurisdiction. In all likelihood, it won’t, unless prudent counsel account for the differences and implement clauses that ensure predictability.
Using Local Counsel and Accounting for Laws of Different Jurisdictions in the Contractual Relationship
Generally, it is advisable to engage local counsel so as to avoid tripping over local rules. The managing attorney may have to establish an understanding that the given client’s position is king, rather than having the local counsel dispassionately analyze the situation from both sides.
The managing attorney’s ability to acquire and coordinate with the necessary local counsel often provides a much-needed edge in cross-border transactions. Local counsel is invaluable when it comes to obscure formalities entirely alien to the U.S. mode of formalizing deals. For example, each party might be required to provide original signatures or wield corporate seals for the bargain to be enforceable[i]. Local counsel may likewise prove useful in navigating the terms of art used in contractual provisions. For example, the term of art “consequential damages” may be viewed and interpreted differently in different legal systems.[ii]. Simpler alternatives may be preferable, in this example, say an absolute cap on damages or a specified amount for liquidated damages.
It is often critical for a cross-border contract to stipulate the precise procedure and governing law to be followed in the event of a dispute. When the parties to a contract are from different jurisdictions or when a client seeks to conduct business overseas, it is common for the parties to negotiate whether the law and courts of one or the other party govern in the event of a dispute. Depending on the nature, and particularly the stakes of a given transaction, the parties may opt for a compromise. For example, selecting a neutral legal system or providing for an alternative dispute resolution procedure in a neutral venue. Today, parties are free to choose from many different national, transnational, or institutional rules, to govern both substance and procedure of a contractual dispute. Parties are likewise free to choose between litigation, arbitration, or other types of procedures in case their contractual relationship goes awry. Practical considerations may boil down to projected costs of pursuing or defending a case in a foreign jurisdiction or within a particular institution as well as the venue’s neutrality toward the parties.
Particular attention should also be given to the length of time it typically takes to resolve a dispute through selected process in the prospective jurisdiction. Just because arbitrating a dispute is often more time effective and potentially less costly than litigating, does not mean that the courts would be a preferred forum for resolving any dispute. Each circumstance is different and needs to be analyzed depending on the particular facts at issue.
It is also crucial to make the client aware of the potential pitfalls of a given jurisdiction, such as mandatory laws, peculiar public policy, or stringent rules like parol evidence. A client is best provided with a range of alternative fallback positions, in case their preferred dispute resolution procedure, governing law, or jurisdiction isn’t accepted.
New York law and courts have emerged as a preferred choice in many contracts. This is, in part, because of the predictability and security that comes along with the provisions of its General Obligations Law Sections 5-1401 and 5-1402. Put simply, these sections allow parties to choose New York law and courts if the controversy satisfies a minimum value threshold of $250,000 for choice of law; and one million dollars for choice of courts regardless of whether the contract has any other connection to New York. Courts in other jurisdictions may have the discretion to reject the selection made by the parties, usually on the grounds that they lacked enough ties with the chosen forum, or that a more appropriate forum was available to the parties i.e. based on the forum non conveniens doctrine.
Clearly drafted and unambiguous jurisdiction, governing law, and dispute resolution clauses are often the most overlooked, but which are most poised to cause havoc when not adequately addressed in an international contract. Omitting either provision has the potential of significantly increasing the time and cost of pursuing either of the parties’ rights under the contract.
A special note for parties drafting an arbitration clause; many jurisdictions consider arbitration clauses as separate and distinct procedural contracts, even if they form a part of the parties’ underlying contract. As such, it is best practice to include a governing law provision within the arbitration clause, which may either mirror or be distinct from that of the underlying contract.
Termination, Force Majeure, and Hardship
Most business contracts include a termination clause. This section of the contract must clearly lay out the circumstances under which one or both parties may terminate the contract, irrespective of the time left under the agreement. Parties are often advised to stipulate payment terms for work that was completed prior to termination. But what if neither party seeks to back out of the agreement, but an event beyond their control occurs that is not covered by the terms of termination?
A force majeure clause concerns an unforeseeable event beyond the parties’ control, arising and thereby preventing a party from fulfilling its contractual obligations due to impracticability, illegality, or impossibility. Since the payment of money by the buyer is almost never excused by the occurrence of force majeure events, it is the seller who should be most interested in having a good force majeure clause. Parties should include a definition of the force majeure events, what happens when such an event occurs, who can suspend performance, and what happens if the force majeure event continues for more than a specified period of time.[iii] A good force majeure clause should be tailored to fit the specific transaction.
Hardship clauses are widespread in contractual practice. That does not mean however, that there is automatic certainty as to the mechanism of their application and scope., From a practical standpoint, it is difficult to establish the hardship if the triggering event is too vague, .[iv] The contract should be written to be highly specific regarding the events that trigger the clause. Defining the consequences of the hardship clause is a logical follow-up that is no less important. Must the parties confer and renegotiate? If it comes to it, does a judge or the tribunal have the jurisdiction under the law or the power necessary to step in and adapt the contract? Failure to clearly address these issues from the outset may drag out the dispute and prove very costly.
In sum, when entering into a cross-border deal, whether it be an investment, the purchase of real estate, supply of products, or any other type of agreement, the parties should be led by competent counsel with experience in structuring the agreement to ensure that three basic questions are answered:
(1) What are the specific terms?
(2) How will the agreement be enforced?
(3) What will happen if the agreement does not work?
The answers to these questions need to be finessed depending on the specific rules and laws of each jurisdiction at issue.