Businesses that are interested in expanding into global markets will inevitably need to sign one or more contracts with various parties, such as local sales agents and freight forwarders. Negotiating international agreements requires all the due diligence needed when finalizing a deal in the U.S., and can pose additional issues and risks that are not present in domestic agreements. Here are six best practices for entering into international contracts.
1. Create a road map for your export journey.
Your international agreement should clarify all the details related to working with the overseas parties related to your business. Comprehensive agreements should clearly define the rights and responsibilities of each party to the agreement. Ideally, your contract should also include all intermediaries in the supply chain.
"Most international contracts have multiple parties involved and you need to identify each party and define everyone's responsibilities in order to minimize your risk," says attorney S. George Alfonso, Of Counsel with Dallas-based Braumiller Law Group PLLC. "By their very nature, transnational commercial agreements include inherently unique issues, risks and challenges, including, but not limited to, the location and the law under which any disputes will be litigated or arbitrated."
Examples of some of the key components of an agreement are product pricing, remuneration, payment terms, product delivery, distribution requirements, support and sales terms, and a well-drafted "dispute resolution section."
2. Spell out expectations and sales goals.
A key component of every contract with an overseas representative is accountability. Performance expectations should be clearly spelled out, along with the requirements for satisfactory performance related to volume or defined time periods.
Exclusivity is another important decision, says Alfonso, whether it involves exclusivity over a particular territory or country—or the types of goods or services to be delivered or provided. "It is usually a good idea to test the performance of partners before offering them exclusivity," he says. "Any exclusivity rights should always be well-defined, and identify exactly what the exclusivity will and will not apply to."
3. Define the dispute resolution process.
The dispute resolution section of a contract is an important element and should clearly define the rights and remedies of all parties to the agreement. This section is particularly important when it comes to facilitating your ability to potentially recover damages in the event of a dispute between one or more of the parties to an agreement.
—S. George Alfonso, Of Counsel, Braumiller Law Group PLLC
"This is a critical element in any transnational agreement as it may ultimately determine where the parties may be able to successfully prosecute claims, seek damages against one another, and recover any damages awarded," says Alfonso.
4. Include an arbitration clause.
One of the cornerstones of a well-drafted dispute resolution section is that it specifies how disputes will be resolved. For American exporters, an international arbitration clause can help level the playing field in the event of a dispute.
When it comes to overseas contracts, international arbitration is usually the best bet for American exporters because disputes can be resolved on neutral ground, or in the United States. "Failure to include an international arbitration requirement may potentially force your company to choose between litigating claims in a foreign jurisdiction, under its foreign laws, or walking away with the loss," says Alfonso. "If the prospective parties to your contract are not willing to agree to an international arbitration clause, you have to ask yourself what level of business risk you are willing to take."
Moreover, Alfonso adds, "Even if you win in some foreign jurisdictions, the chance of actually collecting a judgment can be minimal, at best."
One resource for arbitration, often used by American exporters, is the International Court of Arbitration, run by International Chamber of Commerce (ICC). With arbitration through the ICC, says Alfonso, the parties have flexibility to negotiate the terms and the rules that will govern dispute resolution. For example, the parties can define everything from the number of arbitrators to hear the matter to the physical location of the arbitration proceedings.
5. Define the legal jurisdiction.
The dispute resolution section of your contract also should clearly articulate the controlling law governing the agreement, including the specific legal jurisdiction.
Another important consideration is the actual language used to draft the contract. Contracts used by U.S. exporters are often written in English and the official language of the country in which the agreement covers. But it is important to keep in mind that the local language version may create disputes. For that reason, any agreement should be consummated with certified translations.
Also, if your contract is negotiated by a U.S.-based attorney, he or she most likely will not be licensed to practice law in any of the foreign jurisdictions involved in the agreement. In some cases, you may need to retain counsel in the foreign jurisdictions in order to coordinate with your company's primary attorney.
6. Anticipate contract termination.
No one wants to contemplate divorce before the wedding, but in the world of international business it is important to be proactive in protecting your company and your assets.
Your contract should also specifically outline the steps necessary for a valid termination, without a material breach of the agreement. For example, how far in advance must your partner be notified, and how should that notification be delivered? Also, it is important to define what situations might be grounds for termination, particularly before the end of a defined contract term.
"Good legal counsel in the arena of drafting international commercial agreements begins with the terms of the contract," says Alfonso, "but it's much more than the mere terms, it's about identifying and assessing the potential for risks and working to reduce them. And, when necessary, it's about being able to anticipate what could happen if things go wrong."
At the end of the day, entering into a contract with one or more foreign entities requires not only a focus on the deal, but also consideration for risk management in the event of a problem.