HOW TO DRAFT AN INTERNATIONAL BUSINESS CONTRACT? - ONGUR&PARTNERS

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HOW TO DRAFT AN INTERNATIONAL BUSINESS CONTRACT?


As the differences in the legal systems, cultures, and languages can greatly affect the success of an international business project, international business contracts are very essential during the multinational parties’ trade and/or investment relationships. With the increasing level of business relationships between companies based in different countries, legal matters should be defined in a very clear and strategic formulation to avoid any potential future disputes.

 

Some certain provisions and issues need to be regulated within the scope of an international business contract to avoid any problems. It is considered that the following is among the most important topics that should be covered in international business contracts:

 

1. Parties: Before commencing any relationship and drafting a business contract with a foreign company, necessary investigations should be conducted by both parties to avoid any contingencies. In this regard, due diligence should be performed on respective companies as to whether they are registered to do business in their own home countries and have a good standing with the relevant government authorities. In line with this, an organization chart can be a useful tool to better understand and clarify the power of the signatories and avoid misrepresentation by unauthorized people.

 

2. Notices: Communication is essential for any successful international business contract. The contract should contain a notice provision setting forth names, titles, addresses, telephone numbers, facsimile numbers, email addresses, and the methods of delivery of notifications, such as e-mail, post, etc.

 

3. Obligations and Duties: Regardless of the type of contract, in a well-drafted contract, the obligations and duties of the parties need to be clarified very well. The parties need to be very well aware of their duties and they should confirm related documentation to prove that they have enough capacity to be able to perform their designated duties. In practice, misunderstandings may arise when one party to a contract believes that another party is responsible for taking certain actions or bearing certain costs whereas the other party believes it’s not their obligation or duty.

 

4. Taxes and Expenses: In any contract involving an international business transaction, the parties need to consider related expenses and taxes. Also, they need to clarify who will pay what type of expenses and costs in what way. Especially, when each party has different nationalities, the taxation obligations can be different from one country to another. Therefore, in the related provisions of the contract, the parties need to indicate the responsibilities of each party for taxation and related expenses.

 

5. Governing Language: In commercial relationships, whenever more than one language is involved, it is crucial to choose a common language during the preparation and implementation of contracts. It is a key issue to clearly define which language will prevail for the interpretation of any international contracts. When doing business with a foreign company, the parties should not assume that the contract will be in English or that all correspondence under the contract will be in English. If the parties agree that the contract will be drafted in English, then the contract should also clearly state that all communications under the contract shall be in English.

 

6. Intellectual Property:  Intellectual property rights are a very significant legal dimension of an international business contract and relevant provisions need to be drafted very carefully by the parties to avoid any legal confusion or conflicts. Especially, if the parties desire to transfer or preclude the transfer of intellectual property rights under the contract, the contract should include a provision that establishes the parties' intellectual property rights.

 

7. Payments: The payment method and currency of the payments need to be clarified in any international business contract.  If the payment under the contract will be contingent on the achievement of certain progress or milestones, then the contract should include a provision imposing reporting requirements on the party that receives the payment. Besides, putting such parties under periodic reporting or control obligations is very essential by the party that affects the payment.

 

8. Confidentiality: International business contracts should include a confidentiality clause to provide commercial security to the parties. Confidential information may include the contract itself, documents and communications related to the contract, and other proprietary information designated by the parties.

 

9. Term:  The term of an international business contract should be stated clearly by the parties for them to be aware of their rights and termination methods, etc. In practice, regardless of the type of the contract, if it is a one-off event or a contract subject to annual renewal and/or an ongoing contract that will take years to perform, the parties should expressly state the intended term of the contract. If the duration of the contract is not specified and one of the parties wishes to terminate the contract, many disputes may arise regarding the time-frame for the advance notification which the party must give to the other party to terminate the contract.

 

10. Termination: The parties’ rights and obligations within the scope of termination need to be clearly determined under any international business contract. The parties have the right to know when they can terminate a contract and under which circumstances termination should be executed.

 

11. Remedies: The contract should specify the remedies available to a party in the event of a breach. Examples of such remedies include the right to interest on late payments at a specified interest rate, the right to liquidated damages in a specified and reasonable amount, the right to interest on damages, etc. The currency in which damages shall be paid should also be determined.

 

12. Governing law: The governing law (or "choice of law") of a contract appoints the law that will govern the interpretation and enforcement of the contract. Each company would usually prefer to have the laws of their own jurisdiction for the governing of a contract concluded with a foreign company because they are more familiar with their respective laws. In such cases, the law of a neutral country can be chosen as the governing law.

 

13. Dispute Resolution: International contracts often require the parties to initially attempt to resolve their disputes amicably without resorting to litigation or arbitration in the first place. The contract should designate a time-frame for specified negotiations to settle issues. If the differences cannot be settled within the specified time-frame, then the parties may resort to litigation or arbitration. Parties to international business contracts commonly require disputes to be resolved through arbitration instead of litigation due to confidentiality and the availability of tailor-made solutions provided by international arbitration. In addition to the contract's governing law and method of dispute resolution, the venue for dispute resolution should be included in the contract. If the parties would arbitrate disputes, then the city where the arbitration proceedings will take place should also be designated in the contract.

 

In conclusion, if the above-explained points are considered during the drafting of international contracts, there will be fewer reasons for international commercial disputes to arise.