Top Ten Issues when Drafting International Agreements – Part I

by Faegre Baker Daniels
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Top Ten Issues when Drafting International Agreements – Part I

Cross-border agreements come in all shapes and sizes, from manufacturing agreements to joint ventures, employment contracts to merger agreements. Each type has its own quirks, but we can boil down the most common legal issues to a list of ten.  Half the battle is knowing how to spot these issues, but the other half is recognizing what makes foreign transactions different than domestic ones.  Lawyers know that the business deal drives the agreement, but business people need to know that “boilerplate” legal terms have consequences in the real world.  Here are the first five international contracting issues:

  1. Know the opposing party.  It sounds deceptively simple, but do you really know who is sitting across the negotiating table from you?  If it’s a foreign company, do you know who owns or controls them?  U.S. companies are prohibited from doing business with parties all over the world whom the U.S. government has identified as “bad actors”.  The consequences for transacting with these parties include both civil and criminal penalties.  U.S. companies should be sure to check all foreign parties against the prohibited parties lists maintained by the U.S. government, and to the extent possible, their 50% or greater shareholders.  The most well-known list of bad actors is called the “Specially Designated Nationals List”, but there are others.  A consolidated list can be found on the U.S. Commerce Department’s export.gov website.
  2. Choice of law.  Most U.S. companies already know that the governing law provisions in a contract are critically important.  Having one jurisdiction’s laws govern the relationship removes ambiguity about each party’s rights and remedies.  However, relatively few companies realize that choice of law provisions are not absolute.  Whereas many foreign countries permit another jurisdiction’s laws to govern an agreement that will be performed with its borders, there are often mandatory provisions of law that the parties cannot contract out of.  Take, for example, a situation where a U.S. manufacturer and a foreign distributor agree that New York law governs their distribution agreement.  The distribution agreement may also state that the distributor gets no compensation if the U.S. distributor terminates the agreement.  Although that may be permitted under New York law, many countries require statutory compensation to distributors when the manufacturer terminates the agreement.  Regardless of the governing law provision, the distributor may still be able to enforce its right to compensation under local law.
  3. CISG.  What is CISG and why would or should a party disclaim it from a choice of law provision?  CISG is the acronym for the United Nations Convention for Contracts on the International Sale of Goods.  CISG provides gap-filling provisions for matters on which the contract is silent – it’s like the Uniform Commercial Code in the U.S., but between parties in different countries.  The U.S. is a signatory to CISG, so under the supremacy clause of the U.S. Constitution, every state’s laws implicitly incorporate CISG.  That means if you choose Delaware law to govern your agreement with a foreign party and don’t disclaim CISG, CISG will apply to any matters not otherwise discussed in the agreement.  Is that bad or helpful?  Like many legal issues, that depends.  CISG provides rules on contract formation, conflicting legal terms proposed by the parties and warranty limitations, among others.  CISG’s treatment of many of these matters is inconsistent with the UCC.  If you choose Delaware law to govern your agreement and are relying on the application of the UCC, then CISG can lead to some unanticipated results.  On the hand, if Chinese law governs your agreement, then the application of CISG may provide a set of contract rules that foreign investors find more familiar and reliable than Chinese contract law.
  4. Dispute resolution.  Another issue that dovetails with choice of law is dispute resolution.  The place and forum for resolving contract disputes can be just as important as which law governs the dispute.  U.S. companies often want to resolve contract disputes with foreign parties in the U.S. court system for reasons of convenience and the impartiality of U.S. judges.  But what happens if you win in a U.S. court and want to enforce the judgment against a party in Brazil, for example?  Unless the Brazilian party has assets in the U.S. to satisfy the judgment, you would need to institute a court case in Brazil to enforce the U.S. award.  That is a risky and time-consuming process, and many countries don’t recognize foreign court judgments.  Some foreign courts will even require you to retry your entire case in their jurisdiction in order to enforce the judgment.  That is like going to court twice, and without the benefit of resolving the dispute in the U.S.!  Instead, the better choice is often arbitration.  Many countries are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  This Convention allows U.S. companies to arbitrate their disputes in the U.S., and foreign courts in signatory countries are required to enforce the U.S. arbitration award.  This gives U.S. companies the benefit of both venue in the U.S. and the ability to enforce the award abroad.  The trick is to ensure that the foreign party’s country is a signatory to the Convention (if it isn’t, you haven’t gained anything by using arbitration).  Foreign courts can still make enforcement of arbitration awards difficult, but at least you have the Convention to rely on rather than just local rules.
  5. U.S. laws with extraterritorial reach.  U.S. companies need to be aware that their activities overseas not only have the potential to create liabilities under foreign law, but also back in the U.S.  This can include foreign representatives or agents which are acting on the company’s behalf.  For example, the Foreign Corrupt Practices Act, U.S. export control laws, the U.S. economic sanctions and embargoes programs, and the U.S. anti-boycott regulations all have extraterritorial application.  Failure of U.S. companies to comply with these laws can result in civil and criminal penalties.  It is critical that U.S. companies require foreign contracting parties to make representations, covenants and warranties regarding compliance with these laws, especially where an agency relationship does or could be deemed to exist.

Please join us next week for discussion of the remaining five international contract issues.

 

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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