Common Mistakes to Avoid When Closing International Contracts

Author: Diego A. Andrade, LKC Foreign Legal Consultant

In the real day to day business environment, it is not uncommon for companies to expedite the signature of a contract due to the pressure of closing deals and making their target numbers.  The purpose of this brief is to provide a general overview of complex issues that often arise.  Keep in mind, this is not an exhaustive study. Rather, it is aimed at sensitizing laymen. We aim to help non lawyers develop an intuition of where trouble may lay ahead and when to call your counsel.

One of the most common mistakes people make is refusing to hire counsel in order to save on legal costs. If a company does not have an in-house attorney, it should seek to outsource in-house services with a trusted law firm.  Foresight is hindered if no legal resource is timely involved in monitoring developments, which leads to a reactive culture.  If a company only seeks counsel when there is a problem, prevention of further issues is not given a chance, and this is what ultimately triggers high legal costs. Reaction over prevention poses a big risk.

Another common scenario is when a manager or sales staff attempts to circumvent the lawyer, whether in an external capacity, in-house, or both. Oftentimes the pressure to make their numbers is prioritized to such an extent, there is no tolerance for opposition. In other words, if the lawyer is perceived as an obstacle to business, he may be side-stepped. To avoid this, an attorney must convey the message he or she is a business partner and not an adversary to the deal. To illustrate this point, think of business as a football game. Your sales team is the offense and will seek to score.  Your legal team is the defense and will protect the company against adverse scores.

Time is of the essence, but time is essential.  Lawyers need time to analyze strengths, weaknesses, and multiple scenarios in a transaction.  The devil is in the details and quality work requires addressing existing and potential issues.  Without proper evaluation of law and fact, an attorney cannot shield a company against liability exposure.  It is all too often that lawyers are confronted with contracts amid a drive to close.  In addition to minimal time to do his or her work, the attorney is cornered into putting out incomplete work or merely rubberstamping a deal that has not been fully evaluated. This defeats the purpose of the legal profession. The remedy is timely communication and concerted action. This will also allow all actors to revise expectations according to each situation.

Do not assume that doing business with a foreign party is business as usual with an international component. Regarding dispute resolution, the following are key items to keep on your radar:

  • Consider submitting dispute resolution to international commercial arbitration.  Avoid submitting to the jurisdiction of foreign courts. In broad terms, Arbitration is a swift method to settle disputes between merchants from different countries without resorting to litigation in the courts of a specific country. Its availability and terms are agreed upon by the parties in writing. The aim is to provide access to unbiased and commercially sound rulings that can be enforced before national courts if necessary.
  • When you review a contract make sure that the choice of law or governing law provision is convenient. To the extent possible, it should be a legal system that you are familiar with.
  • When the party you are contracting with is a foreign State enterprise, matters are more complicated. A State-owned company may attempt to impose terms for the application of its own national law and the jurisdiction of its Courts.
  • When you are contracting at arms-length with a privately held foreign company, you have bargaining power and sufficient leeway to negotiate proper terms. Try to use the substantive law of a legal system that is frequently used to arbitrate international disputes. This could be the Law of a US State, or foreign laws such as England, France, or Switzerland, among others.
  • Try to use a language that works for both parties. When feasible try to use English as the arbitration language.
  • When you choose the governing law and language of proceedings, factor in the cost of translations.
  • Be mindful of the costs of using a tribunal of three arbitrators as opposed to one arbitrator.
  • When choosing the place of arbitration, consider the logistics involved with travel.
  • Avoid complicated dispute resolution language. Keep arbitration clauses clear, short, concise, and simple. Refer to the model arbitration clauses rules of a relevant institution (among others, the International Chamber of Commerce – ICC or the American Arbitration Association – AAA).
  • When you opt for arbitration, you cannot also opt for the jurisdiction of the courts of one country (limited exceptions can apply, for instance measures of interim relief.)  Concurrent dispute settlement rules will lead to conflicting provisions.  It is either international arbitration or the jurisdiction and venue of a Court in a specific country.
  • Avoid the practice of copy-pasting different sources and placing terms into a model draft without thoroughly checking for proper context. This will lead to contradictions, ambiguities, and conflicting norms.
  • Make sure you have a clause that establishes which language will control the terms and draft the document in both languages. If there is a dispute and the contract is drafted only in one language, a third-party translator engaged in the task of translating your contract, may use words that you do not agree with.

Failure to properly read, draft and review a contract amounts to creating a contingency. Work with your attorneys in a timely manner and not against them in an untimely manner.  The cost of preventing short-term legal expense will not protect your business against long-term exposure. It may achieve the opposite and trigger future costs and contingencies.

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