International Business Contracts

The American practice of drawing up detailed contracts has seeped into the global marketplace. However, there can be vast differences in how international contracts work. There are differences in enforcement, choice of laws, and dispute resolution. An international business lawyer can help your company understand how contract law works in global markets.

Understanding international business contracts can help your business avoid costly disputes and reputational harm. For legal advice about international business contracts, talk to an experienced international lawyer.

Doing Business in Different Countries

James Bruno has seen plenty of cross-cultural faux pas while mingling with executives in other countries on behalf of his American clients — including his own. Once, at dinner with some businesspeople in Japan, he joined a group toast. “I don’t drink alcoholic beverages, so I raised my water glass, and they started laughing,” says Bruno, an attorney at Butzel Long in Detroit. “I didn’t know that the kamikaze pilots used to toast with water before they went to [their deaths].”

A social miscue like toasting with the “wrong” glass, although embarrassing, is likely the least of your worries when doing business overseas. Contracts are tricky, foreign laws can puzzle even the most educated American attorney, and a language barrier can throw a wrench into everything from casual conversation to trade agreements.

“Even though we know at some intellectual level that things will be different when we go to a foreign country,” says Rich Cicchillo, a mergers, acquisitions, and joint ventures attorney at Kilpatrick Townsend in Atlanta, “we sort of automatically still revert to assuming that deals are done and businesses are run the same in other places as they are here, or that our method of doing it is self-evidently better and they should follow the way we do it.”

The ever-changing world, its laws, and its political climate make international business even more daunting.

Don’t Rush Into International Commercial Contracts

“People have a tendency to rush the deal and shortcut the process,” says Jeffery Daar. Daar is an international business attorney at Daar & Newman in Woodland Hills who has handled countless cross-border disputes and transactions. “That’s where, typically, mistakes are made. People think that adding the cross-border dimension to the transaction will just magically happen, and, in fact, it’s the other way around. That’s often where the basic deal points are made, but the process of making it work is shortcutted.”

Tightening Borders

American business owners must now comply with more stringent privacy laws in the European Union and take care when storing and using personal information about employees. Some countries are responding to higher customs duties imposed by the U.S. with their own tax increases.

The current political climate has greatly affected the way global business is done, according to international business attorneys. “With the rise of what I’ll call populism and a return to nationalism in the U.S. and abroad, barriers to investment are becoming more common,” says Cicchillo. “For the first 20 years of my practice, the trend was probably toward barriers coming down; but as we have made it harder for foreigners to come into the U.S., there’s a sort of tit-for-tat situation going on internationally—both with the very mundane, like visas for entry, to the more detailed. As we tighten our borders, it doesn’t go unnoticed abroad.”

James Hsui, an international business attorney in New York City, agrees, noting a protectionist business climate in which the U.S. is clamping down on laws that apply overseas. “Be aware,” he says, “that the government now would be more likely to enforce things that in the past they might sort of let go.”

Sam Mawn-Mahlau, a corporate attorney at Davis Malm & D’Agostine in Boston, says that in the past, his clients never needed to “sell” the U.S. as part of a business pitch. “Where before, the strength and stability of the U.S. were simply a given, today you’ve got a risk that something unexpected, something you can’t anticipate, will occur because of the political environment. The last tax bill was one of those things. Suddenly, we had alerts going out to clients abroad about a tax regime that would change with two weeks’ notice.”

Clarity and Enforceability

It’s common for a U.S. business to draw up an agreement, only to find out later that the partner isn’t holding up its end of the deal.

“If someone thinks that the contract can’t be enforced, there’s a much higher likelihood that that person may not perform as the other side wanted because they know that their feet can’t be held to the fire,” Daar says. “If a contract has meaningful ways to resolve legal disputes, then people are more likely to perform as expected because they know they will be held accountable.”

Variables like this should be strategized well in advance of the signatures on commercial contracts. Often, this means you will need to rely on more than a domestic counsel.

The language of the contract is doubly important in these contract negotiations, since you’re dealing with a barrier and want to eliminate all ambiguity and double meanings.

Contract Players on a Level Playing Field: Language and International Legal Expertise

It’s a good idea for your attorney to consult with a knowledgeable counterpart in the other country — ideally a foreign lawyer with experience in the U.S. — especially since their governing laws will likely also apply.

“Under international law, the country always, always, always has the right to decide what goes on in its country, what activities are legal, what activities are not legal, and how they’re done,” Hsui says. “It’s important to have the right advice both on this side of the border and the other.”

Adds Mawn-Mahlau, “Think of them as another smart person on your team.” Your U.S. counsel should have contacts overseas or be involved in organizations or international trade associations to find reputable foreign attorneys in international trade law.

Hiring experienced advisors is of utmost importance for small and midsize businesses hoping to compete in the global marketplace, Bruno says — including attorneys, accountants, and bankers. And hiring with diversity in mind can likewise be a boon. “Hiring immigrants and those with diverse backgrounds is a great way to prepare yourself to conquer the world,” Mawn-Mahlau says.

There are several government agencies here and abroad meant to assist in international business transactions, Bruno adds. The U.S. Department of Commerce has various offices that assist small and medium-sized American exporters in navigating foreign regulatory systems and finding credible local partners.

“Finding a lawyer or business adviser who knows that market, its customs, and its people to assist you is very advisable. Trying to do it on your own. That’s where people get into trouble,” Cicchillo says.

“A lawyer can assist with the formation of the foreign entity, assist in the integration of the parent’s process into the operations of the foreign subsidiary, coordinate the funding and tax strategies, and assist in anticipating and solving issues that may develop in the establishment of the foreign entity,” says Bruno.

The Process of Contract Drafting and Enforcement

“There are some regions and countries where enforcement is similar to their traffic laws. In these countries, a written contract is more of a suggestion than a commitment,” Bruno says. “So you have to figure out whether your proposed business partner is one that is likely to adhere to the contract as signed or whether they will continue to come back and ask for concessions.”

Another thing to consider is that a signed contract might be void if it doesn’t comply with the commercial laws of the other country. “To avoid rendering the entire agreement or part of the agreement unenforceable under local law, local counsel’s involvement, even if it is just a sanity check, is important,” says Ying Deng, a corporate and securities attorney at Baker McKenzie in Chicago.

In the United States, a contract clause stating that it’s terminable with 90 days’ notice will likely be valid, Cicchillo says, but may not be the case abroad. “You can put that clause in your contract, but it’s not worth the paper it’s written on because the law says you can’t terminate without good and just cause, like some failure on the part of a distributor,” he says.

Likewise, injunctions are virtually unheard of in some other countries. Courts and judges seldom recognize agreements designed to force the other party to fulfill a contract or follow through with a merger. If you try to get a court order to stop a business associate in China from sharing your trade secrets, for instance, you’ll most likely run into a brick wall.

When Multiple Countries’ Laws Are at Play, Whose Laws Govern a Contract?

So which country’s laws should — and do — govern your business transactions? And which legal system will oversee a dispute? Consider a choice of law clause.

In some cases, legal authority may default to internationally recognized business transaction agreements, such as:

• The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed by more than 160 countries;
• The United Nations Convention on Contracts for the International Sale of Goods, which is often used in lieu of the United States’ basic Uniform Commercial Code; or
• The Singapore Convention on Mediation gives those doing business in participating countries an alternative to filing a lawsuit or seeking an arbitrator.

It’s never too early to plan for potential disputes. Once you have a serious disagreement with your overseas business partner, it’s too late to add a procedure for handling it to your contract. Think about all the what-ifs. “Sometimes you run the risk of two different parties going to different courts trying to stop a proceeding in the other court from happening,” says Hsui. “It gets really, really messy if you don’t have a really well-thought-out plan.”

International Arbitration and Avoiding Legal Battles

Dispute resolution issues should come up in the early stages of your negotiations and drafting, as well. Your contract can address myriad questions that may come up later.

In general, international contracts lean toward arbitration rather than litigation to settle disputes. In some situations, contracts specify that it be done in a neutral country. “We think litigation takes a long time in the U.S.,” says Cicchillo. “You should try countries like India and Mexico. They make our litigation system look like a model of speed and efficiency.”

Foreign countries often dislike dealing with the U.S. because of its far-reaching discovery process. The U.S. system may also give you options such as “provisional remedies like an injunction and the right of appeal,” Daar says.

Mediation is becoming more and more prevalent globally. Daar suggests considering folding that into the dispute resolution section as well. “It sort of makes the parties show, at the outset, that they intend to operate in good faith and will work to keep the deal alive. Also, it obviously can be cost-effective and keep business relationships from falling apart when there is a dispute.”

The best way to avoid a messy legal battle — other than having a bulletproof contract in the first place — is to focus on the business relationship, says Mawn-Mahlau. “Most disputes in contracts are solved by one person calling up another person before they even involve the attorney.”

Getting Legal Advice for These Types of Contracts

If you’re doing a cross-border business deal, it’s crucial that you’re aware of these issues and strategize around them.

“You want to deal with them early on, while you still have negotiating power. If you wait until the very end, usually you don’t have negotiating power anymore, and it’s hard to get what you want,” Daar says.

Every transaction and deal is different: based on the laws, countries, cultures, nature of the transaction, and desires of each party. That said, “I see constantly lawyers, even good lawyers, just use the cookie-cutter approach,” Daar says. You’d be better served by someone experienced in international law and who has connections to others abroad.

Find an Experienced International Business Law Attorney

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