CROSS-BORDER CONTRACT DRAFTING: NAVIGATING LEGAL COMPLEXITIES IN INTERNATIONAL AGREEMENTS

This article is written by Parnika Basak during her internship with Le Droit India.

ABSTRACT

In an increasingly globalized economy, cross-border contracts play a vital role in international trade and commerce. However, drafting contracts that span multiple

jurisdictions poses significant legal challenges. This article explores the complexities of cross-border contract drafting, including conflicting legal systems, language barriers, and cultural differences. It provides practical strategies for navigating these challenges, such as defining key terms, choosing governing law and jurisdiction, addressing currency and payment issues, and ensuring compliance with local laws. By offering guidance on best practices and potential pitfalls, this article aims to facilitate successful international agreements and minimize the risk of costly disputes. Cross-border contracts are crucial for global trade, but drafting them poses legal challenges. This article provides a comprehensive guide to drafting effective cross-border contracts, highlighting the importance of cultural awareness, jurisdictional complexities, and compliance with international norms and the key strategies to overcome the legal complexities and minimize the risk of disputes.

Key Points: Defining key terms and interpretations, choosing governing law and jurisdiction, addressing currency and payment issues, ensuring compliance with local laws and

regulations, protecting intellectual property rights, anticipating termination and dispute resolution.

INTRODUCTION: CROSS-BORDER CONTRACTS AND ITS IMPORTANCE

Cross-border contracts are legally binding agreement that governs business relationships across borders and is the primary tool to mitigate risk in the transaction processes. These contracts are essential for establishing clear expectations, protecting rights and obligations, and avoiding or minimizing potential disputes between involved parties. They provide a legal framework for conducting businesses internationally, ensuring compliance with relevant laws and regulations, and safeguarding the interests of all the parties involved. Cross-border contracts differs from domestic contracts in several ways. Since they involve parties from different countries, they will consider different legal systems, cultural norms, and languages while working any contractual agreements. While English is the lingua franca means the common language which is used in international business, that does not mean it is understandable to all parties fully, resulting in language barriers. As a native English speaker, it is important to look onto the fact that non-English speakers or English as a second language speakers might not understand what they are agreeing to, or might have a different interpretation of a key term. And different cultures may take different views of how “binding” a contract really is. In some places, it may be seen as simply as a “guideline” to how the parties should cooperate, just not a list of binding legal obligations. Understanding the counterparty to the contract, and their history of operating cross borders is important, and it may make sense to enter into a dual-language agreement. In addition to cultural and language challenges, understanding the legal system of the country where the contract will be executed is crucial to ensure compliance and enforceability. You will also need to consider that cross-border contracts are often subject to trade regulations, customs requirements, and cross-border taxation.¹

ESSENTIAL ELEMENTS OF CROSS-BORDER CONTRACT:

¹ Kunal Chandriani, ‘Drafting International Contracts: points to be considered’ (2021) ipleaders <Drafting international contracts : points to be considered – iPleaders> accessed 10 September 2024

With the limitless complexities we have discussed above, it is important to pay more focus on these essential points/ elements that altogether makes up a cross-border contract. These elements are not limited, and includes-

• Acceptance and offer: The party to the contract pays attention to all the terms of the agreement ensuring a mutual understanding amongst all the parties involved in it by accepting the facts of the case.

•  Terms of payment: Specifying the payment methods, currencies and the time of the payment are necessary including avoiding any applicable fees or taxes of any sort should also be mentioned so that ambiguity and disputes related to money are avoided while drafting the contract or agreement.

• Time and Date formats: The format of writing date and time varies from one country to another. Ignoring this critical aspect will cause several difficulties in the fulfilment of contractual obligations. For example: when we talk about the 9/11 terror attack, many Indians would still be confused as to the date being

9th November, instead of the factual date being 11th September. This is because the USA follows the Month/Day/Year format; while India follows Day/Month/Year format. To avoid such clashes, it is advisable to draft the date format as “Month (in words), Day(numerical), Year(numerical)”. Further, certain transactions can be very time-sensitive, for example; import of goods and subsequent export of the same goods. In such cases, time is an essential factor as clearing of port authorities may consume more and more time. Thus, it is advisable to follow the 24-hour format along with specific mention of time zones of both the jurisdictions i.e. GMT (Greenwich Mean Time) and IST (Indian Standard Time). Furthermore, various jurisdictions have different working cultures. They can also be found in various entities in India (e.g. Monday to Saturday with second and fourth Saturdays off; all Saturdays and Sundays off).

However, most of the European nations have a fixed 5 days work week.²

² Kunal Chandriani, ‘Drafting International Contracts: points to be considered’ (2021) ipleaders <Drafting international contracts : points to be considered – iPleaders> accessed 10 September 2024

• Terms of delivery: The shipping and the delivery requirements requires detailing. Moreover, the person responsible for shipping and the insurance should also be mentioned. The modes, responsibilities and the timelines of transportation must be looked upon and agreed with for ensuring the sound movement of processes and for maintaining high satisfaction of large number of customers.
• Jurisdiction and law to be governed: The legal jurisdiction under which the contract shall be interpreted and enforced for resolving disputes must be mentioned without any failure. It counts to be a vital part as well.
• Intellectual property rights: Intellectual property is considered as a complicated area of law, so it must be considered to further safeguard innovations, patents, trademarks, and copyrights within the said contract or agreements.
• Force majeure clause: Force majeure means unforeseeable or unpredictable circumstances that delays or curbs a legal contract from getting fulfilled. The provisions relating to handling the unpredictable incidents or events which are beyond the control of the parties to the contract, must be included. The unpredictable incidents includes natural disasters, political instability, epidemics or pandemic outbreaks. The provisions helps in eradicating any possible risks by establishing certain guidelines to follow that can manage the disruptions.
• Dispute resolution clause: A dispute resolution clause in a contract provides an understanding between the parties stating what should happen in cases when

certain disagreements pertaining to contractual rights/obligations arises, during the subsistence of the contract, and provide for measures to resolve the disagreements before they escalate. Incorporating this clause can, initially prevents the parties from resorting to lawsuits, which can be an expensive and time-consuming process. There are instances when the parties agree to dispute resolution by means of approaching various arbitral tribunals like the SIAC (Singapore International Arbitration Centre), the LCIA (London Court of International Arbitration), etc. At times the cost of arbitration could exceed the consideration of the contract. For example, the LCIA provides for charges at hourly rates, whereas the SIAC provides for fees that shall be contingent on the value of the dispute. Thus, an appropriate forum must be selected depending on factors such as time and cost.

One could consider incorporating a clause for informal discussion for the mutual settlement of the dispute, prior to approaching formal institutions.

CROSS-BORDER CONTRACTS: NAVIGATING COMPLEXITIES OF INTERNATIONAL LEGAL SYSTEMS:

As globalization continues to shape the world economy, international commerce is becoming increasingly complex. The rise of e-commerce, digital transactions, and global supply chains has led to an explosion in cross-border contracts. Although these agreements are profitable for various businesses, but they still do have certain unique legal challenges among them.

When entering into a contract with a foreign party, it’s essential to understand the various aspects of international law. The United States is no exception to it, as both federal and state laws must be navigated alongside the laws of other countries. In this article, we’ll explore the key considerations for drafting and enforcing cross-border contracts, highlighting the importance of cultural awareness, jurisdictional complexities, and compliance with international norms.

UNDERSTANDING FOREIGN LEGAL SYSTEMS

One of the primary challenges in drafting a cross-border contract is understanding the legal systems of different countries. The United States has a common law system, whereas many European nations have codified civil law systems. This inequality and inconsistency can lead to misunderstandings and miscommunications that ultimately affect the success of the agreement. For example, German legal system favours the buyer more than the seller in contract disputes, while that of American legal system, they generally follow the principles of freedom of contract. Simultaneously, French legal system focuses on the importance of formalities, but the American legal systems are more focussed on substance rather than form. A lack of cultural awareness can lead to misunderstandings and disputes arising out of arbitration.³

³ Natasha Norton, ‘Navigating Cross-Border transactions: Strategies for International Business Expansion’ (2024) Conventus Law < Navigating Cross-Border Transactions: Strategies For International Business Expansion. – Conventus Law> accessed 10 September 2024

JURISDICTIONAL CONFLICTS

Another most important issue that arises while determining which jurisdiction must govern an agreement. This is important in the cases where parties choses an ADR (Alternative Dispute Resolution) mechanism, such as arbitration and mediation. In the United States the state and the international legal vertebrae are complex web that affects the enforceability of contracts. For example, the Federal Arbitration Act (FAA) requires that the arbitration agreements should comply with specific procedural requirements in case the state laws imposes additional restrictions. The New York Convention Treaty, similarly plays a pivotal role in governing and maintaining cross-border disputes.

ENFORCEMENT AND LEGAL CHOICES

In case a dispute arises under a cross-border contract, the question of enforceability gains vitality. This determinant factor encourages in hindering the choice of laws clause entangled with the contract. The Second Restatement of conflicts in the laws provides an insight as to how the courts or the judicature applies the foreign laws in certain cases where the parties chooses a different or an alternative jurisdiction. Even after a well drafting of a choice of law clause, the enforceability becomes complex by these issues:

• Whether the jurisdiction would recognise and enforce the contract or agreement.
• Which jurisdiction’s laws would govern the dispute resolution processes.
• What are the procedures that must be followed in order to ensure effective enforcement of contracts.

COMPLIANCE AND CO-OPERATION- THE INTERNATIONAL NORMS

Cross-border contracts most likely involves multiple stakeholders, regulators, and other international organizations. In this complicated scenario, compliance with international norms becomes vital. The UNCITRAL (United Nations Commission on International Trade Law) plays an important role in promotion of uniform international rules for commercial transactions. The UNCITRAL Model Law on International Commercial Arbitration provides a legal framework for maintaining ADR mechanisms, while the New York Convention facilitates the enforcement and recognition of foreign arbitration agreements.⁴

APPROPRIATE MEASURES FOR DRAFTING CROSS-BORDER CONTRACTS:

⁴ Rebecca Dowle, ‘A guide to contracting internationally’ (2023) Clarkslegal < A Guide to Contracting Internationally – Clarkslegal LLP> accessed 10 September 2024

While drafting cross-border contracts, businesses should follow these appropriate measures to minimize risks and ensure successful contract enforcement:

1. Conduct thorough research: Understanding the legal systems involved and complying with those relevant international norms.
2. Choose a suitable jurisdiction: Selecting a jurisdiction that is familiar with international commercial transactions and has an established ADR mechanism.
3. Draft clear and concise language: Ensuring that contractual terms are unambiguous, taking into account cultural differences and jurisdictional lacunae.
4. Include a choice-of-law clause: Specifying which jurisdiction’s laws that govern the agreement and ensure that it complies with applicable international norms.
5. Provide for ADR mechanisms: Incorporating ADR provisions to facilitate dispute resolution in a cost-effective manner.
6. Be aware of cultural differences: Respecting and recognizing cultural drawbacks, communication patterns, and business practices that would help grow trust and build strong relationships with the international partners.
7. Hiring a local counsel: Hiring of professionals who are familiar with the legal complexities and the business practises of the country in which the contact shall be performed, to avoid future issues pertaining to jurisdiction. These legal experts are responsible to guide through valuable insights on local laws.
8. Reviewing the contracts thoroughly: Conducting a thorough comprehensive review of the contract, by ensuring all the terms and conditions aligned with the agreement. To seek information for the same from the legal counsel to identify potential risks.
9. Managing of all the possible risks: After identifying any potential risks in the contract, such as currency fluctuations, political instability, or changes in regulations. Developing contingency plans and risk mitigation policies to protect the interests of all these parties involved in the contract.

CONCLUSION

Cross-border contracts present unique legal challenges, requiring businesses to navigate complex international systems. By understanding cultural differences, jurisdictional

complexities, and complying with international norms, companies can ensure successful contract enforcement and minimize the risks associated with global commerce.

As the United States continues to engage with the global economy, it is essential for businesses to develop a comprehensive understanding of cross-border contracts. By doing so, they can capitalize on the opportunities presented by international trade while mitigating the risks associated with contractual disputes.