An international contract is one that involves certain parties from different countries. To companies, international contracts are the primary tools that are put in place by companies to mitigate risks when dealing with global markets. When parties enter into an international contract, these parties must know which law applies to their relationships, as provisions governing contractual relationships and obligations can vary substantially between countries and in turn, have a substantial impact on the outcome of a dispute.
Thus, The laws relating to international contracts are submerged under private international law, which is used to identify the set of rules and criteria, amongst the two or more theoretically applicable “conflicting” national laws, the application of which is most suitable for governing the parties’ relations. However, the mere existence of circumstances where the parties choose foreign law to govern their contractual relationship does not, in a strict sense, suffice as an element to classify such a contract as international.
It is also commonplace for such contracts to be written in English, even in cases where the parties involved are not from English-speaking countries. Thus, to avoid disputes arising from lack of communication on the part of the non-speaking parties, parties can waive their rights to claim they did not understand the contract, which would render such a contract invalid.
Certain elements must be present when dealing with international contracts. Firstly, such a contract should include the expectations of either party as well as the requirements to be fulfilled for the contract to be deemed as executed.
Secondly, due to the possibility of disputes arising, the section relating to the resolution of such disputes should be clear about the rights and remedies of all parties involved in the agreement. An arbitration clause should also be inputted, as this will specify how disputes should be resolved.
Thirdly, an international contract should not be bereft of steps that can be taken to terminate such a contract without amounting to a material breach of the contract. This type of contract should also include a force majeure, which allows a party to be excused from its obligations due to circumstances beyond its control, such as a natural disaster.
Finally, an international contract should include a section that covers certain requirements which are to be in compliance with applicable laws.
This is the first step in the process of the formation of international contracts. Therefore, this has a direct impact on the length and content of such contracts, which usually vary according to the complexity and economic value of the contract involved. Most major international transactions are heavily characterized by lengthy and complex negotiations. In such cases, the definition of contractual terms are progressive and partial understandings reached in such cases, are not legally binding.
The entire preparatory activity both parties engage in before reaching the final agreement is called the pre-contractual phase. Cross-border transactions often turn out to be very complicated, mainly due to contractual relations involving subjects that speak different languages and work in different business environments. However, if they succeed, the parties transcend to a point in the transaction where their interests are placed on the table and a mutual understanding of their rights and obligations are set forth.
Although agreements have not been finalized upon and legal obligations have not been imposed on either party, there is a duty on all parties involved to follow certain rules of conduct, even in the pre-contractual phase. Thus, the minimum standard of conduct is embodied in the duty to negotiate in good faith.
Historically, the principle of good faith emanates from ancient Roman law, which was then absorbed by the European legal tradition. When applied to the negotiation stage, the principle of good faith translates into obligations of many forms that differ from legal system to legal system. The variety of ways in which the notion of good faith is perceived, interpreted, and applied in the different legal systems is effectively illustrated by Lord Justice Bingham:
“In many Civil Law systems, and perhaps in most legal systems outside the common law world, the law of obligation recognizes and enforces an overriding principle that in making and carrying out contracts, parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognize; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table…English Law, has, characteristically, committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness.”
Another rule of conduct prescribed by the principle of good faith is the requirement for each party to provide the other with all essential information about the object of the deal. This enables a precise ascertainment of interests before the formation of a contract. This duty is breached when a party intentionally misleads the other which, if known, can lead both parties to a different decision.
Article 1.7 of the main UNIDROIT provisions on good faith in negotiation states:
“(1) each party must act in good faith and fair dealing in international trade.
(2) The parties may not exclude or limit this duty.”
Summarily, the principle of fairness in negotiation constitutes a general condition of fair play, the content of which cannot be predetermined accurately.
During a negotiation, the parties may decide to outline the progress made by drafting and exchanging notes on the process of the negotiation. Such notes may be coined as “terms of agreement” that will be duly signed by all parties involved.
The instrument that serves this purpose is the Letter of Intent (LOI). This instrument differs in its structure, however, it is most commonly structured in resemblance of a contract, which stipulates the intentions of the parties and is duly signed by the same parties. Understanding that a contract has not been formed at this stage, an LOI is not a legally binding agreement, but it imposes a moral value on parties to such an instrument. Summarily, an LOI is to ensure a thorough understanding of the terms proposed in the contract.
The drafting stage of international contracts is one that must be proceeded with great caution. In drawing up the contract, the parties must state in plain terms, the substance and terms of the obligations accorded to all parties involved in the contract. As earlier stated, such formal contracts are in a written document, which serves as the legal foundation that governs all transactions related to such agreements.
These agreements involve the parties acting as their own lawmakers, where the rights of all entitled parties involved are clearly defined and their duties, explicitly stated. This mitigates any risk of misinterpretation or the need for further discussions.
However, the main essence why drafting a properly written contract is crucial consists not only in the agreement’s major role in guiding the parties and possible interpreters to a correct understanding of the agreement but also in the utmost importance of using a form suitable to produce a contract that is rational, intelligible and in compliance with applicable law.
Dushyant’s Legal services provide top-notch consultations, as well as ensuring that international agreements involving its clients are of the best international standards and practices.