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7 Pitfalls to Avoid in International Business Contracts

//7 Pitfalls to Avoid in International Business Contracts

7 Pitfalls to Avoid in International Business Contracts

Companies foraying into international business should be mindful of these 7 common exposures inherent to international business contracts:

  1. Counterparty Elusiveness
  2. Distributors vs. Agents
  3. Implied laws
  4. Ambiguity
  5. IP Recognition and Non-Competition Undertakings
  6. Governing Law
  7. Arbitration or Court

Intellectual property (“IP”) refers to patents, copyrights, trademarks, and/or trade secrets.

1. Counterparty Elusiveness.

When doing international business, companies can mistakenly ascribe local business / legal norms to foreign jurisdictions. This is risky, as the same rules do not always apply in other regions of the world.

In light of this, it is wise to always ensure the foreign counterparty is not only legally bound to the written and signed agreement but that such counterparty is the correct party with whom your company should contract. For instance, in many countries a contract will only bind a counterparty if signed by an authorized signatory of the counterparty company. As such, it is advisable to obtain a current copy of the counterparty’s articles of incorporation or other relevant document wherein your company can confirm that the person signing on behalf of the counterparty can legally bind the counterparty. This approach should not only be applied to the initial execution of the deal but each time any separate documents, such as addenda or amendments, will be executed between the parties.

Additionally, some counterparties will form affiliates (e.g. a subsidiary) for certain international business deals. If your company enters into a contract with any such affiliate, instead of the ultimate counterparty parent company, it may be wise to obtain a guarantee from such parent company (i.e. that the parent company will step in and cover any liabilities caused by the affiliate). Otherwise, if the contemplated business does not go as planned and your company desires to seek legal recourse to cover its losses, such affiliate may not be sufficiently funded and may be placed into bankruptcy leaving your company to sustain its losses and damages without any compensation. Contact Us.

2. Distributors vs. Agents.

In simple terms, a distributor buys products from your company and resells the products (at a profit) to third parties whereas an agent does not buy products from your company but rather sets up deals between you and a customer (whereby the agent receives a commission).

While there are many ways of entering into foreign markets, these are two common methods. The risks are that whether or not you call the appointment a distributorship or an agency, the laws of the local country where the counterparty is appointed will likely look at the actual circumstances surrounding the relationship in making a finding as to which scenario applies. While many countries have rather liberal laws, emphasizing a freedom to contract between parties to a distributorship, other countries may take a more restrictive approach to agency agreements in order to protect agents who build up a local market for a foreign supplier from being terminated by the foreign supplier without cause in the future. In countries where agents receive such additional protections, a foreign supplier may be required to delay termination of the agent and/or pay the agent substantial damages as reasonable compensation for the agent having built up the market in question.

In light of the foregoing, whenever creating a plan for international business expansion, it is key to understand the same principles may not apply from one country to the next. B2World can help you develop a desired approach to global expansion and to further identify (with the help of third party specialists) which terms must be adapted for various international markets. Contact Us

3. Implied Laws.

As mentioned in point 2 above, laws in various countries can be implied into international contracts. Sometimes such implied laws can be disclaimed (i.e. stipulated in the contract as having no legal impact—and will be enforced as such) while other such implied laws are deemed compulsory (i.e. cannot be disclaimed even if the contract expressly states the parties intend for such implied laws not to apply).

In point 2 above, it is worthy of note that in many countries, for instance those nations within Europe, the rights flowing to agents by law cannot be removed from an agency agreement. In many countries, however, certain warranties on products and services will be automatically included in an international contract unless the parties disclaim the applicability of such warranties in the written agreement. Examples of these warranties can relate to warranties of quality or fitness for a particular purpose or warranties against IP infringement.

In light of this, it will be key for every foreign market within which you will do business to determine what laws will be implied into the agreement as well as which of the subject laws can be disclaimed by the parties in the agreement. In undertaking this analysis, it may at times become apparent that, given certain unavoidable implied laws, a particular business model should not apply to certain specific foreign target markets. Contact Us

4. Ambiguity.

In international agreements, there are often additional challenges of cultural differences as well as varying levels of competence with the language of choice for the written agreement (which is frequently English these days).
Because of the complexity of deals in general as well as cultural and linguistic implications in international deals, it is not uncommon for provisions to end up in an agreement which can be interpreted in more than one way. These situations can be terribly difficult, expensive, and time-consuming to resolve. In light of this, it is critical to ensure that the material terms

in your written contracts have only one reasonable meaning. If anything is unclear, courts may or may not (depending upon the rules of evidence for the given jurisdiction) look at emails and other written communications leading up to and even during the contractual relationship. Needless to say, in such situations the outcomes can be difficult to predict. Contact Us

5. IP Recognition and Non-Competition Undertakings.

For most (if not all) companies, there are certain IP implications of the service and/or product driven business in question. In light of this, before venturing into foreign markets—it is imperative to ensure your company’s IP will be protected under the laws of the country wherein the contemplated business is being pursued. For instance, trademarks and patents, should be registered with the relevant foreign authorities. In the event your company has not registered such rights or is prohibited from registering such rights, your company must employ an effective IP strategy to ensure its IP is not compromised on the foreign market.
Further, given some agreements may be with counterparties of scale—it is advisable to include contract clauses wherein counterparties not only acknowledge the existence of certain IP but also agree that such IP belongs to your company and that the counterparty has never and will not in the future file any IP registrations which implicate any IP which is the same or otherwise similar to your IP.

Finally, in the event your company is licensing sensitive IP to any counterparty, such license can be conditioned upon the counterparty refraining from engaging in any competition with your products and / or services. In the event your company shall impose a non-competition undertaking, best practice dictates that a liquidated damages clause be included in the agreement whereby the licensee will be obliged to pay a specified sum of damages for each instance of breach without your company having to prove the amount of actual damages sustained. This is advisable given that actual damages can be difficult to establish. Contact Us

6. Governing Law.

I have encountered a certain issue time and again. A company will have a standard contract drafted and will enter into contract discussions with a foreign customer prospect. As the agreement is being finalized, the counterparty requests the agreement only be changed with regard to the governing law so that the nation or state within which the counterparty is situated is chosen as the venue for disputes to be resolved and the country’s or state’s laws will similarly apply.
Given this is so simple to change on paper, it is all too easy to overlook a broad range of risks that surface due to that simple amendment.
Firstly, a counterparty will be more likely to take legal action in its own jurisdiction. So, your last minute change will give the counterparty home-court advantage and substantially increase the probability of a dispute ending up in court.
Secondly, as mentioned previously, different countries may imply different laws into an agreement. Thus, an agreement that is otherwise concrete in your home jurisdiction may look like Swiss cheese in another country or state whereby the holes are filled in with local laws that you have not accommodated for in your contract.
Thirdly, damages in some countries (for example, in the United States) can be awarded at a much higher level than in other countries (such as countries within the European Union) and, as such, without receiving any further upside from changing the governing law section of your agreement, you may have exposed your company to a considerable downside if legal action is taken. Contact Us

7. Arbitration or Court.

There are various considerations in selecting arbitration or court as your dispute resolution mechanism and this may hinge on the country’s or state’s laws which will be used to govern the agreement as well as the venue for legal actions to be heard.
For instance, arbitrations are generally confidential proceedings whereas court proceedings are typically public. In light of this, the company with the greatest need for confidentiality (i.e. to safeguard its IP, protect its corporate reputation or to avoid arousing regulatory scrutiny or third party claims) will favor arbitration. Thus, if your company is the David in a David-and-Goliath deal, it may be wise to seek a court resolution as this will help your smaller company gain negotiation leverage by threatening to file a lawsuit in open court against the Goliath. This can be surprisingly effective against publicly listed companies.

Another issue arises in connection with the enforceability of a judgment. If you are seeking a judgment in one country but will have to enforce the judgment in another country (for instance where the counterparty actually has assets), your company must ensure that the judgment will be enforceable in the country where the assets are located. This is not always the case. For instance, within the U.S., a judgment or arbitral award in one state will typically be enforceable within another U.S. state. The same principal applies within the European Union—i.e. a judgment in one country within the EU will generally be recognized by another country within the EU. However, countries in the EU will often not recognize court judgments from the U.S. (given the disparity between the legal systems and the types of damages awardable).

With the foregoing said, many countries have become signatories to the New York Convention under which one country that would not recognize a court judgment from another country may accept an arbitral award from that other country and thereby allow the arbitral award to be enforced. In light of this, if opting for arbitration, always ensure both parties are signatories of the New York Convention for the types of parties / contracts in question. Contact Us

Naturally, there are a host of other issues that can impact your company’s international business contracts. The 7 Pitfalls discussed herein are, however, issues B2World has advised clients on many times over the years. Feel free to contact us to learn more about how we can help you.

We wish you the best of luck in closing many lucrative international business contracts!

*This article is not legal advice and is provided for general information purposes only.