Why International Contracts Are Important

 

 

International contracts are one of the most noticeable legal tools for limiting the risks of participating companies and individuals in international trade and commerce.

As well as other contracts, international contracts are binding agreements but with an international dimension, which contains some foreign elements, such as differences in language, country (or jurisdiction), legal system, culture, etc.

At first glance at this international dimension, especially the aspect of “difference in the country” it might be assumed that a contract is international only when the parties are from different countries, while international contracts are also drafted between parties from the same country. In this case, the international element of the contract can be related to the parties’ significant assets in different countries, the different jurisdictions where their obligations are to be performed, or the aim of having legal influences outside the parties’ country.

International contracts have many functions in today’s transaction world and play an important role in expanding trade between countries by creating legal relationships between participants of the global market. The importance of these contracts has some main aspects, such as:

1. Enforceability:

Similar to any other contract, parties of an international contract also need to be assured of enforcement of the contract, performance of the other party’s obligations and receiving the contract’s consideration. Especially in an international contract, where mostly the parties are in or from different countries and legal systems and this difference can cause some uncertainty or hesitation. Therefore, the binding power in international contracts provides a suitable level of confidence and assurance between the parties.

2. Parties’ free will in choosing:

2-1) The governing or applicable law: For a contract to be properly enforced, there must be an applicable law to govern the contract. As in international contracts, there are some considerable diversities, such as different domicile, nationality, legal systems, and jurisdiction, the parties of an international contract have the right to freely negotiate and choose the applicable law to their contract. This chosen applicable law will cover not only the interpretation of the contract’s clauses but also the validity, effect, and discharge of the contract.

2-2) The language of the contract: As it is frequent in international contracts that the parties do not speak the same language, they can choose one or two languages to be the language of their contract, which is mostly English and the language of one of the parties, which is used as the translation of the English text.

2-3) The methods of dispute resolution and jurisdiction: Since the applicable law in international contracts are chosen by the parties (except for some countries, such as Indonesia and China where the courts insist on drafting all kinds of contracts in the local language.), choosing the methods of dispute resolution is also a right for the parties. For instance, many international contractors tend to choose arbitration as the dispute resolution to resolve any possible difficulty or dispute, with the minimum time or cost. In addition, choosing the jurisdiction will appoint where any dispute related to or raised from the contract, will be heard and processed, which is another key point to the importance of these contracts.

 

• Different types of international contracts:

• International distribution agreement: a commercial contract providing a good framework for parties to international business relationships. These agreements are based on distributing goods and exist between a supplier and a distributor, in which the supplier can be either a producer of goods or only a reseller.
• Letter of credit: a financial contract between a bank, a customer of the bank, and a beneficiary.
• Investment agreement: a contract to help formalize a transaction between an investor and a company where the investor obtains an ownership interest in the company, in exchange for a type of investment.
• International sale contract: an agreement between a buyer and a seller that identifies the parties in the transaction, the goods or services being sold, the terms and conditions of the sale, and the price to be paid. These contracts are under the rule of the United Nations Convention on Contracts for the International Sale of Goods (CISG). This convention governs only the international sale contracts between businesses, which in the parties’ business place is located in the contracting states under the CISG unless the parties have agreed upon the applicable law otherwise.
• Franchise agreement: a contract under which the franchisorgrants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor’s trademark.
• Joint venture agreement: a contract between two or more business entities or individuals who enter into a temporary business relationship (joint venture) for achieving a mutual goal.
• Development agreement: a contract between a property owner or developer and a local government.
• Intellectual property license: a contract that allows individuals or businesses to use another’s IP rights in exchange for a fee.

 

• Necessary points:

Creating a legal relationship and linking commercial companies or investor individuals in the trading world, considering the vast differences between legal systems and business environments of the countries, has always been a challenge in this area, which can be well and effectively managed by drafting professional international contracts by complying some necessary points, such as:

1. Preserving the typical characteristics of the contract:

• The contract’s text must be written clearly, without vague clauses and sentences, to define the contract’s objective transparently.
• For possible problems in the process of the contract such as execution, interpretation, and assumption, the contract must include complete and efficient solutions.
• The contract must be concise and at the same time, detailed.
• The contract must be fair and takes into consideration the needs of both parties who are about to sign it.

2. Payment clause:

The contract’s payment terms and methods are one of the most important and disputable matters in the field of international trade. Therefore, addressing them clearly and exactly in a clause, is an effective way to reduce conflicts between the parties.

3. Termination clause:

Adding a termination clause to international contracts is a tool to enable the parties to terminate their contract before its expiration. This clause can force the parties to accomplish their obligations before the other party decides to terminate the contract and its possible benefits.

4. Jurisdiction and dispute resolution clause:

It is necessary to appoint a specific country’s jurisdiction to adjudicate any dispute arising under or in connection with the agreement. Besides, the parties should stipulate whether the disputes will be resolved by litigation or arbitration. 

5. Force Majeure clause:

Under the contract provision of force majeure, the parties to a contract are relieved from performing their obligations in some specific circumstances, which are beyond their control or will and make the performance impossible, illegal, or impracticable. Considering the possibility and unpredictability of natural disasters or other force majeure examples, an international contract must include a force majeure clause to prevent potential challenges.

 

Written by: Bahare Mokhtari