Successfully Trekking Into International Contracting
Every year, 50,000 hikers enjoy the ascent to Yosemite Valley’s imposing and iconic summit of Half Dome. While sometimes technical and hazardous, the trek is well-worn, with many hikers reaching the summit multiple times over the years.
Experienced hikers sometimes seek a unique twist to the Half Dome adventure—by hiking overnight, you can enjoy sunrise from the top. Though the path is well-marked and the way well-known, the change in context obscures the forests below Half Dome, sometimes sending even experienced hikers off the path and towards Clouds Rest or other parts. The best way to avoid missteps along the route is to know how the route changes in a new light.
The same lesson holds true for domestic entities looking to enter international commerce. While many aspects of international commerce are similar to domestic commerce, the new context risks tripping up even experienced business people. Again, the key is to know how the route changes in a new light. Here are a few of the changes that domestic businesses may encounter in international contracting.
Deal breakers. Does the deal involve a banned product, country, company, or individual? Check the U.S. Bureau of Industry and Security lists. (Also, look here.) Also, have your banker check the bank’s flagged persons/entity list.
Export laws. Does the transaction involve the export of a product for which an export license is required under U.S. law? Military, aerospace, nuclear, and dual-use technology items (such as encryption, software code, forensic data labs), and certain medicines and substances may require a license. What will be the timing and cost of such a license?
Beware of agents. Under many foreign laws (including even Puerto Rico in the U.S.), engaging in a transaction with or even sending samples and promotional materials to a foreign company can establish that company as your exclusive agent. Terminating the agency may be expensive or difficult, possibly requiring payment of a number of years of imputed profits. Identify these issues and include in your contract express provisions regarding the nature of the relationship (agent, distributor, independent contractor), the responsibilities of each party, and termination rights.
Intellectual property. Your know-how, patents, trademarks, or copyright materials may be your most important assets. Will the foreign party or foreign laws protect those assets? In your contract, include intellectual property provisions as to permitted use, ownership (including of improvements), and termination of use rights and other protections. Understand the risks and remedies (or lack thereof) if the foreign party breaches the contract.
Incoterms. International traders use a particularized lexicon of terms describing the transportation, sale, and delivery of goods, as well as the risk of loss, transfer of title, and other obligations. Examples include EXW (Ex Works, i.e., out of the factory as delivery point and transfer of transport costs, title, and risk), FOB (Free On Board, i.e., the contract includes, without charge, delivery to the buyer’s listed destination), CIF (Cost Insurance and Freight, i.e., the seller arranges for transporting the goods to a destination port and provides the buyer with the necessary documents for obtaining the goods), and so on. Know and understand these terms and correctly incorporate them into your contracts.
Taxes. Be clear in the contract who pays customs duties and taxes. Understand what taxes will apply to the transaction and in the foreign jurisdiction.
Allocation of risks. Other areas where an international context may cast a new light on contracting include the allocation of specific deal risks, such as market or currency fluctuations; and force majeure clauses, to address what happens in the event of a labor strike, war, terrorism, or government act. Are the risks insurable and who is the loss payee? You might speak with an experienced insurance agent about risks and explore any government programs, such as SBA or EXIM Bank, to address political or credit risks.
Payment terms. Consider options: wire transfer, credit terms, barter, documentary letters of credit. Discuss options and ways to mitigate risk with the international department of your bank.
Additional performance. Is the timing of delivery critical? What training, service, or maintenance may be needed in the foreign jurisdiction?
Get it in writing. While a contract can maximize a party’s rights and remedies, a contract is only as good as the parties to it. This is particularly true in international trade.
Go-bys. Avoid forms, blanks, or provisions you do not understand.
Consider all costs. Costs may include product costs, insurance costs, freight, import duty, warehousing, terminal handling charges, custom brokerage fee, bank costs, state and local taxes, governmental regulations, and other informal or non-tariff barriers. Has your distributor or business partner engaged in similar transactions and learned the local practices? Like the intrepid hiker, following an experienced guide can aid you in avoiding unforeseen pitfalls and in making the trip productive and enjoyable.
Dispute Resolution. Consider in advance how to resolve a disagreement, should one arise.
Who are the potential parties? Consider the likely claims or disputes (payment, performance, indemnity) and identify the potential parties. If several parties will be involved, how do you get each of them in a single forum for efficient resolution? A contract with each party may be needed to do so.
Arbitration or litigation? Arbitration is often preferable in international contracts because of the New York Arbitration Convention, which provides for the enforceability of arbitration agreements and awards in approximately 128 countries. Otherwise, judgments by U.S. courts are generally not enforceable in other countries.
Under what tribunal’s rules should you arbitrate? International contracts should make specific reference to a recognized arbitral tribunal and to particular international arbitration rules, such as the American Arbitration Association International Centre for Dispute Resolution or the International Chamber of Commerce. Consider whether to include ad hoc or tribunal administered arbitration. Further considerations include, but are not limited to, whether to require mandatory mediation before arbitration and the number of arbitrators (typically one neutral arbitrator; three can get very expensive).
Where should you arbitrate? Where are the parties and any witnesses, goods, or assets subject to the award located? Is convenience paramount? If so, a local city with good commercial airline service may be selected.
What choice of law should govern? Most U.S. businesses will want the law of a familiar U.S. jurisdiction to govern. However, the foreign party may feel similarly about its law, leading to negotiation on this point. Unless the choice of law is expressly made, the Convention on International Sale of Goods (CISG) or United Nations Convention on International Trade Law (UNCITRAL) rules may apply to a contract between a U.S. entity and a foreign party.
What language should govern the contract and be used in dispute resolution? Language provisions may state that all communications are to be in English. If the contract is in two languages, consider a side-by-side translation and state that the English version will prevail in the event of a conflict.
When people hike Half Dome at night, the goal is to enjoy the sunrise from the top, not get lost and end up somewhere else. In entering an international contract, the goal is to grow your business successfully, not to get lost in the unfamiliar landscape of international contracting. By knowing the route and how it changes before you undertake your venture, you help to ensure reaching your goal. If you need a guide, speak with someone experienced who knows the way.
Charles Baldwin is a partner and Ryan Fairchild is an associate with the North Carolina law firm Brooks Pierce. Both have significant experience in helping companies begin to pursue business overseas. This article expresses the views of the authors and does not constitute legal advice or express the views of Brooks, Pierce, McLendon, Humphrey & Leonard, LLP. You are advised to seek independent legal advice regarding any contract or international transaction.