11 Essential Clauses in International Contracts
The world has become a global village and increasingly, individuals and companies are doing business with counterparts across their borders. From international distribution agreements, internationals sales contracts, franchise agreements, joint venture agreements, intellectual property agreements – name it, business in the international market is now common place.
For international business to thrive, it is necessary for players in this market to agree on their terms of engagement before ‘the game’ begins.
So what should you include in your international contract?
The contract should clearly indicate what its ‘official language’ is.
Often, international contracts will be written in English, even where the parties involved are not from an English speaking country. However, such contracts can be disputed on grounds that a party did not understand what they were signing, opening them up for invalidation.
One, parties can agree to have the contract solely in English and waive their rights to invalidate it on grounds of lack of understanding of its contents at the time of entering into it.
Two, they can opt for a dual language contract, that is, one written in English and another language or vice versa; clearly stating which of the two will be the guiding language. It is advisable that the translated version be verified and validated with a certified translation.
Whichever option is taken; the parties’ intention must be clearly stated in the contract.
- Responsibilities & Expectations
As specifically as possible, the contract should set out the duties and responsibilities of each party, e.g obtaining any licenses required, the payment of taxes or the taking out of insurance cover that may be necessary.
Performance expectations should also be outlined with as much precision as possible, to make it practicable to determine whether the contract requirements have been fully satisfied or not. The use of such words as reasonable and substantial should be avoided as they can be widely and subjectively interpreted. Exact dates, quantities, periods of time and amounts should be used instead.
The contract should also specifically require compliance with applicable laws in the parties’ respective jurisdictions for the duration of the contract e.g licensing and anti-corruption laws.
The agreed mode, dates and currency in which payments are to be made or received should not be left to assumption.
Details of these should be particularized in the contract as accurately as possible. For instance, if dollar is the desired currency, the contract should further identify which one it references e.g the American, Canadian or Australian Dollar.
- Governing Law & Jurisdiction
Governing law refers to which country’s or system of law will be applied for the interpretation and enforcement of the contract. Jurisdiction on the other hand refers to which country’s courts will have jurisdiction to decide a dispute if it arises, that is, the designated venue.
Often, parties to international contracts agree on the laws of their own jurisdiction, those of the state or country where the contract was entered into or in cases of disagreement, those of a neutral country.
Most often, the choice of law goes hand in hand the jurisdiction, so that a single state or country will regulate both the content of contract and resolve any disputes.
While this may be the convenient and easier choice, the choice should be made in light of such factors as the country where the parties have substantial assets, or what would happen if it became necessary to immediately enforce contractual obligations outside the preferred jurisdiction.
- Dispute Resolution & Enforcement
In addition to the ability to enter into contracts, parties must also have opportunity to have their disputes resolved and enforce their contracts if necessary.
It is therefore fundamental that they agree on how this is to be done, whether through judicial action or alternative dispute resolution (ADR) mechanisms.
Formal judicial systems can be very slow and costly, and there may also be difficulties associated with enforcing a court judgment outside the country where it was issued.
To avoid these problems, parties opt to subject disputes to ADR e.g arbitration, mediation or conciliation.
ADR mechanisms are confidential, often cheaper, less formal and timely. Because they are voluntary, parties are more likely to comply with the awards or agreements reached following an ADR process than a court judgement.
The parties also have the option to designate who presides over the dispute, whether at a national or international level. Notable international ADR bodies and tribunals include the International Centre for Dispute Resolution (ICDR), UNCITRAL, the China International Economic & Trade Arbitration Commission and the world Intellectual Property Organization.
When choosing an enforcement mechanism, consider ease of access, the time it will take, any procedural rules etc. The process should also be cost efficient.
It is advisable that the contract gives room for the parties to attempt to resolve their differences amicably before resorting to third parties. A time frame within which this ought to be done should be set, to prevent unnecessary delays.
The contract should expressly state the period for which it is intended to run – is it a one-time event or an ongoing contract for a number of years with or without the option of renewal?
If not specified, confusion and disputes are likely to arise.
It is also important to agree and specify whether the contract may be terminated before it runs its course, without creating a material breach of the contract.
The parties must be specific on whether or not cause is required, clearly spell out the factors that must be satisfied to justify termination of the contract for cause, or, the conditions to be fulfilled should one wish to terminate without cause.
The length of notice to be given prior to termination should also be indicated.
No one enters into a contract with the intention to breach it, but let’s face it, breaches happen.
For certainty and assurance of compensation, the contract must specify the agreed remedies that will be available to a party in the event the other fails to fulfill its contractual obligations e.g interest at a specified rate on late payments, liquidated damages of a specified amount or the mode of ascertaining damages payable.
- Intellectual Property
For most contracts, intellectual property will be developed, transferred or come into play one way or another. The contract must therefore establish the parties’ intellectual property rights, including ownership, assignment, and grant of any licenses, whether exclusive or non-exclusive.
The parties should also set the limits of the right of use of brands and any applicable prohibitions.
- A force Majeure Clause
A force majeure clause provides for when a party can, or can seek to be, excused from performing their obligations due to circumstances beyond its control. These may include acts of God and acts of Government, and make performance of the contract impossible.
The contract should specify what should happen and the procedure to be followed by a party seeking to be discharged from their contractual obligation in the event of occurrence of a force majeure event.
The contract should prescribe how communication and notices under it will be given, the length of the notices, the addressees and their contact information.
These clauses are fundamental in any international contract negotiation. However, international contracts can be complex and since each is unique, there is no ‘one size fit all’ exhaustive list. It is therefore advisable that you seek legal counsel before entering into an international contract. Contact DLS on……for help with yours.