International Business Contracts Checklists
Differences in language, culture, and legal systems can greatly affect the success of an international business relationship. When doing business with a company based in another country, it is essential to have written agreements which cover matters that are unique to international business. At Cantwell & Goldman PA, our international business attorneys can help U.S. domestic and foreign companies thrive in both Florida and the global marketplace.
The following is a checklist of topics which should be covered in international business contracts:
- Parties. Before entering into a contract with a foreign company, due diligence should be performed on that company to verify that the company is registered to do business in its home country and in good standing with the relevant government authorities. Obtaining an organization chart of that company’s business structure (e.g., parent, subsidiaries, affiliates, etc.) will uncover potential areas of concern or areas for future collaboration. The individual who is designated to sign the contract on behalf of the foreign company should have the legal authority to do so, and the contract should be signed in accordance with the relevant formalities (Execution Formalities).
- Duties. Misunderstandings arise when one party to a contract believes that the other party is responsible for taking certain actions or bearing certain costs. Accordingly, the duties of each of the parties should be described in the contract with as much specificity as possible. For example, international sales of goods have unique handling, shipping, and taxation aspects. The contract should specify the INCOTERMS rules ( INCOTERMS Rules) which will apply to the contract in order to establish the duties, risks, and costs associated with the shipping of goods from one country to another. Since government licenses or approvals may be necessary to import or export certain goods (e.g., sensitive equipment, software and technology) or to provide goods or services in certain countries, the contract should designate which party will be responsible for obtaining such licenses or approvals. ( U.S. Import/Export Portal, Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), Office of Foreign Assets Control (OFAC)).
- Geographic scope. If the ability of one of the parties to engage in business will be limited under the contract to a specific geographic area (e.g., franchises or distributorships), then such geographic limitations should be specified in the contract. The laws of certain foreign jurisdictions may prohibit the imposition of geographic restrictions that would be lawful in the U.S.
- Language. When doing business with a foreign company, the parties should not assume that the contract will be in English or that all correspondence under the contract will be in English. If the parties agree that the contract will be drafted in English, then the contract should also clearly state that all communications under the contract shall be in English if that reflects the parties’ intentions. If the parties will use a dual language contract (i.e., a contract written in English and another language which is often in dual-column format), then the contract should state that the English language is the controlling language of the contract and that all notices and communications under the contract shall be in English.
- Notices. Communication is essential to the successful performance of an international business contract. The contract should contain a notice provision setting forth the amount of notice to be given, the points of contact within each organization (e.g., name, title, address, telephone number, facsimile number, email address, etc.), the method of notice to be given (e.g., email, postal service, etc.), and the language(s) in which notice may be given (i.e., whether notice must be given in English or whether notice may be given in another language).
- Currency. When doing business with a foreign company, the parties should not assume which currency will be used for payment. If the parties desire to make or receive payment in Chinese renminbi, then the contract should state that all amounts due shall be paid in Chinese renminbi. Since many countries call their currencies “dollars” (e.g., Australia, Bahamas, Canada, Cayman Islands, Hong Kong, New Zealand, Taiwan, etc.), the parties should specify which dollar they intend to use for currency (e.g., “U.S. dollars” or “USD”) rather than simply state “dollars.”
- Anti-Corruption. The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits payments to foreign government officials to assist in obtaining or retaining business ( Department of Justice FCPA). The FCPA’s anti-bribery provisions apply to all U.S. persons (not just publicly traded companies) and certain foreign companies. In contrast, the record keeping provisions of the FCPA apply only to companies which are publicly traded in the U.S. Accordingly, at a minimum, an international business contract should include a provision which forbids the parties (and its subcontractors) from making “prohibited payments” under the FCPA and applicable anti-corruption laws and allows for termination of the contract in the event of a violation.
- Intellectual Property. A comprehensive discussion of international intellectual property rights is beyond the scope of this checklist. Nevertheless, if the parties desire to transfer or preclude the transfer of intellectual property rights under the contract, then the contract should include a provision which establishes the parties’ intellectual property rights, including the grant of any licenses (i.e., exclusive or nonexclusive) and the ownership of intellectual property rights developed in connection with the contract (e.g., works for hire, intellectual property developed from the parties’ contract, etc.).
- Audit Rights. If payment under the contract will be contingent on the achievement of certain progress or milestones, then the contract should include a provision imposing record keeping and reporting requirements on the party receiving payment and subjecting such party to periodic audits by the party making payment. Such provisions typically address which party will pay for the cost of an audit (whether or not a discrepancy is found through the audit), whether third party auditors must conduct the audit (or whether a party may conduct the audit itself), the scope of the audit, the frequency of the audit, the period of time following expiration or termination of the contract that audit rights may be enforced, etc. In the context of international business, financial records may be in a language other than English and may require the cooperation of the party being audited or the assistance of translators. Documents, data, and individuals with firsthand knowledge of transactions may be physically located overseas, so such an audit will likely be more costly and time consuming than an audit of a comparable domestic company.
- Confidentiality. International business contracts typically include a confidentiality provision (also referred to as a nondisclosure provision) which prohibits or restricts the ability of the parties to disclose confidential information to third parties. Confidential information could include the contract itself, documents and communications related to the contract, and other proprietary information designated by the parties. The duty of confidentiality often survives the termination or expiration of the contract for a specified number of years (in some cases, indefinitely). Confidentiality obligations are taken more seriously in certain parts of the world (such as in Japan) than in other parts of the world (such as in Latin America). Since it can be difficult and expensive to enforce a confidentiality provision against a foreign company, the preferred practice should be to limit the amount of sensitive information shared, limit the audience authorized to receive such information, and encrypt electronic data whenever possible.
- Term. Whether the contract is a one-time event, a contract subject to annual renewal, or an ongoing contract that will take years to perform, the parties should expressly state the intended term of the contract. If the duration of the contract is not specified and one of the parties desires to terminate the contract years later, a dispute may arise as to how much advance notice that party must give to the other party in order to terminate the contract.
- Termination. The parties should specify whether cause is necessary to terminate a contract or whether the contract may be terminated without cause. If cause is required to terminate a contract, then the contract should clearly describe each of the factors that must be satisfied in order for a party to terminate the contract. Termination of certain types of contracts with foreign companies (e.g., exclusive distributorship agreements) can be extremely difficult and large termination payments may be required to end such relationships (even where such termination payments are not provided for by contract).
- Remedies. The contract should specify the remedies available to a party in the event of a breach. Examples of such remedies include the right to interest on late payments at a specified interest rate, the right to liquidated damages in a specified and reasonable amount, the right to interest on damages, and the currency in which damages shall be paid. Clearly describing the parties’ remedies in the contract will provide greater certainty to all constituents in the event of a breach, notwithstanding that the governing law of the contract will ultimately control whether and the extent to which remedies are enforceable.
- Governing law. The governing law (or “choice of law”) of a contract is the body of law that will govern the interpretation and enforcement of the contract. A company will usually prefer to have the laws of its own jurisdiction govern a contract with a foreign company because they are more familiar with their own laws. For example, a Florida company might prefer to have Florida law govern its contract with a French company. The French company might prefer to have French law govern its contract with the Florida company. If the parties cannot agree as to whether Florida law or French law should govern the contract, then they might select the laws of a “neutral” jurisdiction to govern the contract. Examples of “neutral” jurisdictions include New York, England, Switzerland, Singapore, etc. Once the governing law has been selected, another consideration is whether to opt out of the United Nations Convention of Contracts for the International Sale of Goods if the contract is for the sale of goods ( CISG).
- Dispute Resolution. International contracts often require the parties to initially attempt to resolve their differences without first proceeding to litigation or arbitration. The contract should designate a timeframe for specified senior management from both parties to settle issues which subordinates were unable to resolve. If the differences cannot be settled within the specified timeframe, then the parties may resort to litigation or arbitration. Parties to international business contracts commonly require disputes to be resolved arbitration instead of litigation for two reasons. First, arbitration proceedings are confidential and not part of the public record. Second, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention) provides for a streamlined process to enforce arbitration awards in member countries as opposed to the difficulties associated with enforcing a court judgment outside of the country where the judgment was issued. There are a variety of international arbitration tribunals with their own rules, so the parties should designate the desired tribunal (ICC, ICDR, UNCITRAL, etc.), the specific rules (e.g., year, edition, or version of the rules), the number of arbitrators, and the language of arbitration which will apply. Most of these tribunals offer model arbitration clauses for insertion into international commercial contracts ( ICC Model Clause, ICDR Model Clause, UNCITRAL Model Clause).
- Venue. In addition to the contract’s governing law and method of dispute resolution, the venue for dispute resolution should be included in the contract. If the parties will arbitrate disputes, then the city where the arbitration proceedings will take place should also be designated in the contract. In contrast, if the parties prefer to litigate their claims in the courts of a state, then a provision should be included in the contract stating that the courts of a designated venue (e.g., New York County, New York) shall have exclusive jurisdiction to decide any and all disputes arising under, related to, or in connection with the contract.
Since the foregoing checklist does not address all of the topics which should be addressed in an international business contract and each international business contract raises unique issues, any company or person considering entering into an international business contract should engage the services of an attorney who is experienced in international business law such as the international business attorneys at Cantwell & Goldman PA. Call us at 866-583-9129 or contact us online.