International Contract Considerations
With the internet and development of the cloud-based storing and sharing capabilities, companies have found it much easier to engage in international business transactions. Writing and negotiating an international contract has many of the same considerations as a domestic contract. It must include the essential terms, such as identification of the parties, the descriptions of the goods and services, and the price. However, it should be noted that there are a few important sections to pay special attention to.
Official Language Clause. This clause generally states what language version of the contract will govern if there’s ever a dispute. Text translated from one language to another can unintentionally lead to some disagreements about the meaning of contractual language because of differences in syntax and meaning in the source of the text.
Governing Law Clause. The governing law clause, which specifies which country’s laws apply to the agreement and would be applied in the event of a dispute. This is one of the most important clauses of the contract. Using U.S. federal laws and your state’s laws are preferable, but in many situations the other party may require that the law of their foreign country control the transaction. This is a difficult situation to handle, as in some cases, the foreign law may be written in the county’s official language not English. For example, German law may be written in German, and your U.S. attorney may not speak German. If you don’t have a way of fully understanding and gaining competent representation to advise on the pitfalls under the other party’s local law, you may wish to review the United Nations Convention on Contracting for the International Sale of Goods, a.k.a. the CISG. The CISG is an automatically biding body of law that applies to contracts that include one party that is at home in one of the participating countries, including the United States. It is similar to the Uniform Commercial Code, which governs the purchase and sale of goods in the United States. If you do not wish for it to apply to your transaction, you must affirmatively disclaim the application of the CISG in your agreement. If you cannot manage to bind the agreement by the CISG or your local law, we advise that you retain counsel in the other party’s country to review your agreement and advise on any pitfalls.
Forum Selection or Dispute Resolution Clause. There are multiple ways to resolve an issue that may arise from a contract, including mediation, arbitration, and litigation. When dealing with an international contract, the ideal situation is either mediation or arbitration. When drafting or negotiating the dispute resolution clause, the agreement should specify which arbitration rules would govern in the event of a dispute, such as the American Arbitration Association (AAA) rules for international contracts. The AAA has arbitration clauses that may provide guidance when drafting such terms. There are also other organizations that will enforce arbitration across borders for those countries under the treaty such as the Convention on Recognition and Enforcement of Foreign Arbitral Awards. This is an important tool that may be of use when you’re assessing the risk of using a specific set of rules. Another consideration is the location of the arbitration, which may be set in the agreement. This is an important consideration when you consider the international travel involved to resolve the dispute and the burden that it may place on the productivity of your business.
Taxation: The most difficult issue to consider is the taxation of goods and services internationally. Most countries have a value added tax, or VAT, on goods and services that are consumed within its borders. Each country will have a set of laws and regulations and there are international treaties that govern certain transactions. You must determine if your business transaction would be subject to the taxation set forth by any of the countries involved, including the United States. It is always advisable to consult with an international tax professional when selling or purchasing goods abroad.
If you’re contemplating engaging in an international transaction, Contact Us to discover how we can help make sure that your contract language is drafted to protect your interests.
