Top Ten Issues when Drafting International Agreements – Part II

by Faegre Baker Daniels
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Continuing the discussion from our last post, these round-out the top ten issues when drafting international agreements:

  1. Method of Payment.  If you’re the party providing the goods or services under the agreement, you want to be sure you get the consideration you bargained for.  Any fool knows that, but international contracts can make receiving payments complicated.  The first issue is currency – what currency will the payment be made in?  Which party bears the risk of currency fluctuations if payments are spread out over time?  Which party will bear the cost of currency conversion (i.e., banking fees)?  The second issue is taxes.  Does the local jurisdiction impose any taxes on your payment, such as value added taxes?  Does providing the good or service result in any tax withholding obligations?  The third issue is foreign exchange rules.  Most countries’ currencies are freely traded, but countries like China have strict controls on exchanges of their currency.  Getting large sums of money into and out of China requires approval of the Chinese government.  Finally, if you are the payor under the contract, are you comfortable extending credit to your trading partner?  If not, consider requiring payment in advance or using a letter of credit.
  2. Intellectual Property.  The first issue is protecting existing IP .  U.S. companies must identify which IP to bring with them overseas and what protections to put in place before introducing that IP into the market.  If you’re going to be doing business in China, for example, you should expect your IP will at some point be stolen.  We counsel clients not to bring any IP to China that they can’t afford to lose.  If you do want to take your IP abroad, make sure you register it with the local authorities before your products enter the market.  Most countries have a “first to file” system, meaning that someone else can register your IP before you do, making it theirs in that country.  You can limit that risk by registering the IP before it hits the local market.  The second issue relates to new IP.  In the U.S., we have the concept of “work for hire”, meaning that any IP created by an employee on the job is owned by the employer.  Some countries don’t recognize this concept, and even if an employee creates IP in the course of performing his/her job duties, using employer-provided tools or know-how, the employee may still be considered the owner.  Employers generally cannot circumvent this legal requirement, but they can add provisions to employment contracts requiring employees to assign worldwide rights to that IP to the employer.  Compensation for that assignment may or may not be required by local law.
  3. Non-compete Clauses.  Most U.S. states generally allow companies to enforce non-compete covenants between them after an agreement terminates.  By contrast, some foreign countries either do not permit non-compete clauses at all, or they do not allow them to extend beyond a certain period of time (either before or after termination).  In China, enforcing a non-compete clause is extremely difficult – Chinese courts do not award equitable relief like injunctions.  Instead, it is typical to see liquidated damages clauses in Chinese contracts to provide relief for breach of a non-compete covenant.
  4. Delivery Terms.  In contracts where goods will be delivered or received across borders, use of the appropriate international delivery terms is critical.  The International Chamber of Commerce has created a standardized set of internationally-recognized delivery terms known as the Incoterms®.  The eleven Incoterms® rules tell you (i) which mode of transportation can be used for the shipment, (ii) which party arranges for carriage, (iii) which party pays for carriage, (iv) which party arranges for insurance, (v) which party pays for insurance, (vi) which party handles export and/or import clearances, and (vii) where risk of losses passes.  The Incoterms® do not tell you where title to the goods passes, as that is generally a matter of the governing law of the agreement.  Many countries permit the parties to determine where and when title passes, and this should be clearly identified in the contract.  If possible, title and risk of loss should pass at the same time.  Although both the Incoterms® and the Uniform Commercial Code (adopted by most U.S. states) use identically named delivery terms like “FOB” and “Ex Works”, those terms do not have identical meanings.  When goods are being delivered across borders, the delivery term should reference the Incoterms® and the location where risk of loss passes under the applicable rule.
  5. Warranties and Product Liability.  In the U.S., manufacturers and suppliers of goods often limit warranties like warranties of merchantability and fitness for a particular purpose.  When goods are being supplied for use abroad, the buyer’s country may limit which warranties can be disclaimed, regardless of the governing law of the contract.  This is especially true for consumer goods.  U.S. manufacturers and suppliers should be sure to determine the territorial scope of their product liability insurance and whether the amount of coverage is adequate to cover any product liability claims in the buyer’s country.  In addition, addressing product recalls in cross-border contracts is important.  Recall provisions should identify which party will be responsible for the expenses associated with a recall and which party is responsible for communicating with the local government authorities.

International agreements present a host of issues that are “foreign” to domestic contracts.  With the tools outlined in these posts, you should now be armed to spot these issues and ask the right questions.  It’s all about identifying and quantifying risk, and the more legwork you can do on the front end, the less the pain in the rear!

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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