Taking your business abroad can be a great way to expand your customer base, increase market share and lower production costs. Although the benefits of an international business venture are plentiful, they are accompanied by a significant amount of risk, which, if not properly mitigated, can far outweigh the rewards. Due diligence is your best ally in risk mitigation, even more so when it comes to international contracts.
The contract is king
Your contract, whether national or international, is always the first point of reference when a dispute arises between two commercial parties, and will guide an arbitrator or judge in determining your respective rights, obligations and remedies. If you are conducting business internationally, an airtight contract is by far the best way to ensure predictability and efficiency in your business transactions, and properly protect your interests in the case of a disagreement. An international contract can take on many forms, but all solid contracts have this one thing in common: they clearly outline the detailed rights and obligations of the parties involved.
Unfortunately, it’s common for entrepreneurs, in a rush to close a deal and get their business up and running, to neglect taking the proper time to review the agreements that will govern their business relationships, much to their detriment. Although your contract is unique in that it will reflect your company’s specific needs and goals, there are at least two provisions which you should always include in your agreement:
- governing law; and
- dispute resolution.
In my experience, these are the clauses that are most often overlooked, and that have the potential to cause the most damage when not properly addressed in your contract.
Clearly identify the jurisdiction of authority in your “Governing Law Clause”
Governing law, otherwise known as “choice of law”, is a fundamental component of an international contract. What this means is that somewhere in your contract, you should clearly state the mutually agreed upon law of a jurisdiction that will apply to and govern the terms of your contract in the event of a challenge. An example of what this would look like in your contract is:
1.1 Governing Law – This Agreement shall be governed, construed and enforced in accordance with the laws of the Province of Ontario. Any dispute arising between the parties shall be dealt with exclusively in the courts of that Province.
In international trade, the contracting parties are typically able to choose the law that will govern their contract. Whether it be U.S. law, Ontario law, or Shari’a law, the choice is open to the parties. You are not limited to choosing the domestic law(s) of one of the contracting parties. For instance, if your business is in Ontario and you are contracting with a Japanese company for the supply of widgets, you can choose to have Ontario law, Japanese law, or the law of any other jurisdiction apply to govern your contract, that might be advantageous to your situation (i.e. U.S. law).
Avoid a geographical headache
If a dispute arises without a clearly defined choice of law clause in your contract, you will face additional time and expense in determining which country, state or province has jurisdiction. It is therefore imperative that that all parties to the contract properly negotiate and mutually agree on the governing law at the outset, so that there are no surprises down the line and expectations are clear.
Litigation? Arbitration? Choose the best option in your “Dispute Resolution Clause”
A dispute resolution clause is important in any international contract because it clearly defines the methods and procedures for the resolution of disputes between the parties, whether it is through arbitration, litigation, or any number of other available options. Although you may have an established business relationship with a partner you can trust, disputes, although not intentional, can still sometimes arise. Simply put, having a dispute resolution clause is somewhat comparable to having an insurance policy on your car. You don’t expect to have an accident, but if you do, you’re protected. Similarly, in the contract scenario, you don’t anticipate having any issues with your partner, but if you do, you are both aware of what process you will follow and what remedies are available to you. Including a clear dispute resolution plan in your contract will reduce both the time and the cost of international litigation.
More and more international contracts provide for arbitration as an effective and efficient way to resolve disputes between contracting parties. An arbitration clause could read something like this:
“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
You will also want your clause to address the governing law to be applied to the arbitration, the place and language of the arbitration, and the number of arbitrators to be involved.
Avoid a referee headache
A strong dispute resolution clause that is enforceable and clear is a critical step in the conclusion of commercial conflicts. Always keep in mind that your contract is what governs the relationship between you and your commercial partners. A contract is not something to be taken lightly and not something that you will have an opportunity to correct retroactively. Do your due diligence, and engage experts, when necessary, to make sure your contract properly protects you and your interests.