Domestic companies expanding into the global market need to thoughtfully manage contractual agreements. International trade is not uncommon, of course, especially with today’s technology at our fingertips, but to companies and business owners new to the game, there are a number of considerations and best practices in managing new relationships beyond U.S. soil. Proper management of international contracts and agreements becomes crucial for ensuring smooth transactions and mitigating potential risks.
Understanding the unique aspects of cross-border contracts, ensuring that key substantive terms are included, following best practices for negotiation, and considering suitable dispute resolution mechanisms are essential to help businesses minimize risks, enhance compliance, and build strong partnerships across borders. Being proactive in your approach to international contract management will pay off. With this in mind, we will explore all of these topics to ensure you, your company, or anyone tasked with managing cross-border contracts and agreements gets the process started correctly.
The Importance of Cross-Border Contracts
What is a cross-border contract? In short, it is a legally binding agreement that governs business relationships across borders and is the primary tool to mitigate risk in the transaction.1 These contracts are essential for establishing clear expectations, protecting rights and obligations, and avoiding or minimizing potential disputes between involved parties. They provide a framework for conducting business internationally, ensuring compliance with relevant laws and regulations, and safeguarding the interests of all parties involved.
Cross-border contracts differ from domestic contracts in several ways. Since they involve parties from different countries, you will have to consider differing legal systems, cultural norms, and languages as you work on any contractual agreements. While English is the lingua franca—the commonplace language—used in international business, that does not mean all parties fully understand the English-language contract in the same way.2 As a native English speaker, it is important to be cognizant of the fact that non-English speakers or English as a second language speakers might not understand what they are agreeing to, or might have a different interpretation of a key term. And different cultures may take different views of how “binding” a contract really is. In some places, it may be seen as simply a “guideline” to how the parties will cooperate, not a list of binding legal obligations. Doing your due diligence to mitigate this issue ahead of time is crucial. Understanding your counterparty, and their history of operating across borders is important, and it may make sense to enter into a dual-language agreement.2
In addition to cultural and language challenges, understanding the legal system of the country where the contract will be executed is crucial to ensure compliance and enforceability. You will also need to consider that cross-border contracts are often subject to trade regulations, customs requirements, and cross-border taxation.
Key Elements of Cross-Border Contracts
With the complexities we explored above it mind, it is also helpful to pay attention to the key elements that make up a cross-border contract. These elements include, but are not limited to:2
- Offer and acceptance: Here, you want to pay attention to the terms of the agreement. Ensure that there is a mutual understanding and acceptance of the contract by all parties involved.
- Payment terms: What currency will be used for transactions? Make sure that you specify the payment methods, currency, payment milestones and timing, and any applicable taxes or fees to avoid ambiguity and financial disputes when you draft your contract or agreement. It’s best to address these considerations early.
- Delivery terms: Outline the details of your shipping and delivery requirements. Who is responsible for shipping and insurance? Who is responsible for ensuring customs clearance upon arrival? Agreeing on transportation modes, responsibilities, and timelines are important to ensure your processes are logistically sound and to maintain high customer satisfaction.
- Governing law and jurisdiction: Under which legal system will the contract be interpreted and enforced? Be sure to note the jurisdiction for resolving disputes, as well. We will explore how to manage disputes later in this post.
- Intellectual property rights: Considering intellectual property is a complex area of law itself, you will want to address ownership, licensing, and protection of intellectual property to safeguard innovations, patents, trademarks, and copyrights within your contract.
- Force majeure clauses: Force majeure relates to unforeseeable circumstances that delay or prevent a legal contract from being fulfilled.3 Be sure to include provisions to handle unforeseen events or circumstances beyond the control of the parties, such as natural disasters, political instability, or pandemics (we know all too well, now, how these affect our day-to-day), to mitigate risks and establish guidelines for managing disruptions.
Best Practices for Negotiating Cross-Border Contracts
With all of the key elements in place in a careful and clear draft of your contract, you can begin negotiations. Successful negotiation of cross-border contracts requires a nuanced approach. Here are some best practices to consider:2
- Be aware of cultural differences. As noted above, recognizing and respecting cultural nuances, communication styles, and business practices will help foster trust and build strong relationships with your international partners.
- Hire local counsel. Hiring professionals who are familiar with the legal system and business practices of the country in which the contract will be performed is best to prevent future issues, especially regarding jurisdictional issues. These legal experts will provide you with invaluable insights and guidance on local laws and regulations.
- Review the contract in its entirety. Conduct a comprehensive review of the contract, ensuring all terms and conditions align with the intended agreement. Again, be sure to seek input from legal counsel, subject matter experts, and stakeholders to identify and address potential risks or inconsistencies.
- Manage all potential risks. Take the time to identify and assess potential risks associated with the contract, such as currency fluctuations, political instability, or changes in regulations. Allocate those risks between the parties, and develop contingency plans and risk mitigation strategies to protect the interests of all parties involved.
Dispute Resolution Mechanisms
Despite your best efforts to mitigate risks and address potential conflicts up front, disputes may arise during the course of your cross-border contract. With this in mind, consider your dispute resolution mechanisms—litigation, arbitration, and mediation—and choose the most appropriate mechanism to resolve whatever issues that arise.
Even before embarking on a formal dispute resolution process – which can be both time-consuming and expensive—consider whether focused discussion or negotiation with the other side may reach an acceptable settlement.
If this does not work, you are on to a formal process. With litigation, you will resolve disputes through the court system of the chosen jurisdiction that was selected when drafting the contract. This is why it is particularly important to understand any international company’s jurisdiction if yours will not be the primary on the contract.4
If you opt for arbitration, an impartial third party, the arbiter, or panel of arbitrators typically chosen by the parties will review your case and deliver a binding decision. Arbitration offers flexibility, confidentiality, and international enforceability through the New York Convention, if it applies.5
Finally, mediation is an option to engage a neutral mediator who facilitates communication and negotiation between parties to reach a mutually acceptable solution.6 Although mediation is non-binding, it encourages collaboration and problem-solving, which can help preserve your business relationship with the other involved party.
This will only take a moment.
Grow Your Expertise in International Business Law With Pitt Law
Effectively managing cross-border contracts is vital for successful cross-border business operations. It behooves business professionals to seek out legal education to grow their expertise in handling cross-border transactions and disputes. Solidify your position as a leader in business with Pitt Law’s Online Master of Science in Law (MSL) program and the International Business Law specialization. This 30-credit graduate degree program pairs core courses that give you a foundation in a wide range of legal topics with your chosen specialization. Or, choose the standalone Online International Business Law Certificate program for a shorter, 15-credit path to hone in on law topics that directly affect international business practices.
As you consider Pitt Law’s Online MSL program or one of our online graduate certificate programs, know that Admissions Outreach Advisors are on standby to answer your questions, clarify admissions requirements, and discuss what this degree can do for you. Schedule a call today.
- Retrieved on May 31, 2023, from upcounsel.com/international-contracts
- Retrieved May 31, 2023, from legal.thomsonreuters.com/en/insights/articles/top-10-tips-in-drafting-and-negotiating-international-contracts
- Retrieved on May 31, 2023, from investopedia.com/terms/f/forcemajeure.asp
- Retrieved on May 31, 2023, from forbes.com/advisor/legal/litigation/
- Retrieved on May 31, 2023, from wipo.int/amc/en/arbitration/what-is-arb.html
- Retrieved on May 31, 2023, from ca4.uscourts.gov/mediation/preparing-for-a-mediation