Cross-Border Contracts: Drafting and Negotiating

What is a cross-border contract?

A cross-border contract, also known as an international commercial contract, involves parties situated in at least two different jurisdictions. This characteristic is the defining feature of such contracts and carries a number of legal implications. While many national legal systems are working to adapt their regulations to facilitate cross-border trade, certain aspects can only be addressed through written agreements between the parties involved. To provide a better understanding of these contracts, we will explore traditional provisions typically found in commercial contracts, along with specific considerations that apply to international transactions.

Key Considerations in Drafting Cross-Border Contracts

Parties’ Identification

When your counterparty is from a foreign country, it is crucial to obtain as much detailed information as possible about the party, i.e. its legal form, person(s) authorised to act for the company, business address and last but not least, postal address for delivering formal correspondence. Whenever possible, such information should be obtained from official business registers in that party’s country.

In today's world, nearly every state looking to attract more foreign businesses has established a government-run companies registry to help identify their counterparts. Examples include the UK's Companies House, the UAE's National Economic Register, and Ukraine's Unified Register of Legal Entities. Each registry offers a specific set of publicly accessible information. However, when dealing with certain jurisdictions, like the UAE, it often requires much more in-depth investigation beyond a simple registry search. The information available through this register, there, is quite limited, typically only including the company name and trade license numbers. Therefore, obtaining additional company documents for further analysis alongside public records is crucial for ensuring a certain level of safety.

Choice of Law

Another thorough consideration in international transactions needs to be given to the law governing the contract. However, understanding of a legal background in a specific country involves not only an extensive reading of its codes. Often, an essential source of the law, especially in aspects of its interpretation, lies within judicial precedents. This requires review and analysis of an array of court judgments to evaluate the legitimacy and enforceability of a contract.

In most cases, this happens to be impractical or demands substantial legal expertise. As a result, when drafting a commercial contract, parties often choose a jurisdiction they are familiar with as the governing law or may leave this clause unaddressed, which can either benefit or disadvantage the parties involved.

Compliance with Local Laws

Parties involved in a contract must not only be aware of the governing law, but they must also ensure that their agreement complies with the current regulations set by government agencies in the relevant jurisdictions. This includes adhering to local licensing and permit requirements, tax laws, import/export controls, and any industry-specific standards.

In a cross-border contract, the parties can assign the risks associated with non-compliance with such regulations. This may include designating a party responsible for any taxes, levies, and fines incurred in a specific jurisdiction or related to a transaction. However, understanding the full range of potential implications is crucial for a successful venture.

Jurisdiction and Dispute Resolution

When drafting an international commercial agreement, it is important to include provisions for resolving disputes between the parties. Typically, but not always, the contract will specify the courts in the jurisdiction of one of the parties as a venue for any legal action to be taken. As an alternative, some may choose a sustainable neutral country jurisdiction under the belief that a strong rule of law will offer them the best protection. However, this is not always true, as it is not only the formidable law involved that matters, but also how easily a concerned party can access the justice system in such a country.

In most cases, to represent a company in legal proceedings requires engaging a local attorney. Therefore, before deciding on a foreign country’s courts, think ahead about how feasible it will be to hire a lawyer who understands your needs without the aid of an interpreter, in places like, for example, Switzerland or the United Arab Emirates.

When choosing a jurisdiction for dispute resolution, consideration must, among others, be given to:

• potential costs of hiring a legal representative in the chosen jurisdiction.
• understanding the procedural laws and rules of evidence in the selected jurisdiction, and
• how the enforcement will be carried out in the country of the judgment debtor,

These factors can significantly impact the outcome of a dispute, even when the governing (substantive) law is favourable.

An alternative option is to submit disputes to arbitration. This can eliminate the need for translation and provide a more transparent and understandable procedure, yet not a time- or cost-efficient one.

Language

International contracts are often drafted in more than one language. In bilingual agreements, it’s essential to specify the authoritative version of the contract and, if needed, ensure accurate translations are provided to avoid misinterpretations.

Cultural Sensitivity

Sensitivity to different business practices and communication styles can impact discussions and lead to misunderstandings. This is especially the case when the parties’ native countries have different legal systems, such as Common Law and Civil Law jurisdictions. Here, the level of detail to be discussed and agreed upon can vary drastically. Nevertheless, robust contractual provisions setting out each party’s rights and obligations can work out most of the uncertainties regarding how the parties have treated each stage of contract performance at the time of entering into it.

Conclusion

A well-drafted contract that considers the unique challenges of international transactions ensures clarity and protects the interests of all parties involved. To secure these aspects, in addition to all standard clauses pertinent to a particular type of transaction, it is prudent to negotiate and include:

• Parties' Information: sufficient for parties’ identification and delivery of official correspondence;
• Standard Terms: with a degree of detailisation necessary to avoid misinterpretation or implication of any unintended terms, which can be customary in an unknown legal system;
• Local Laws Compliance: defining a party or parties bearing the risks of failure to abide by local laws and regulations;
• Governing Law of Contract: opting for a familiar legal system is sometimes the safest option;
• Jurisdiction and Rules for Dispute Resolution: taking into account the accessibility of the chosen dispute resolution mechanism;
• Dominating Language of the Contract: in bilingual contracts, this will be the language referred to in case of inconsistencies in translation.

Businesses looking to expand into international markets need to pay attention not only to the commercial aspects of their agreements but also to the legal complexities that come with operating in different jurisdictions. Engaging a legal professional early on is always advisable, as this can help establish effective dispute resolution and recovery measures. Most importantly, it can prevent many potential issues from arising in the first place.